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2000 Report on United States Barriers to Trade and Investment

REPORT ON UNITED STATES

BARRIERS TO TRADE AND INVESTMENT

2000

EUROPEAN COMMISSION

Brussels, July 2000

Foreword

The 2000 Report on United States Barriers to Trade and Investment is the sixteenth such annual report. It hasbeen compiled by the Unit for Relations with the United States of America of the Directorate General forExternal Relations in cooperation with the Market Access Unit of the Directorate General for Trade and theDelegation of the European Commission in Washington, D.C., on the basis of material available to theservices of the European Commission. Its aim is to provide an inventory of obstacles that EU exporters andinvestors encounter in the US.

This Report needs to be placed in the context of a transatlantic economic relationship which has grownparticularly strongly over the years, to the benefit of both economies, and which is underpinned by the mostextensive trade and investment links in the world.

EU-US relations are currently conducted within the framework of the New Transatlantic Agenda (NTA) andaccompanying EU-US Joint Action Plan adopted at the EU-US Summit of December 1995. Efforts under theNTA to intensify and extend multilateral and bilateral co-operation in the field of trade and investment led tothe adoption, at the EU/US Summit in London in May1998, of a joint statement on the TransatlanticEconomic Partnership (TEP) and the subsequent TEP Action Plan, endorsed at the December1998 EU/USSummit in Washington. Under the Action Plan, we are giving particular priority this year to specificinitiatives in the fields of technical barriers to trade and regulatory cooperation, extended Mutual RecognitionAgreements in the goods sector, to expand MRAs to certain services sectors and to specific joint projects onbiotechnology.

Furthermore, the EU-US Summit in Bonn on 21 June 1999 approved a set of "early warning" principles, thataim at identifying and preventing potential bilateral problems at an early stage, in order to prevent conflictsand facilitate problem resolution before they risk undermining the much broader EU-US relationship. We arenow in the process of finding ways to making these principles function in practice.

This Report must therefore be seen against the background of the joint commitment of the EU and the US, inthe NTA and in the TEP, to strengthen and consolidate the multilateral trading system, and to progressivelyreduce or eliminate barriers that hinder the flow of goods, services and capital between the EU and the US.

The fact remains that a considerable number of impediments, ranging from more traditional tariff and non-tariff barriers, to differences in the legal and regulatory systems, or due to the absence or limitation ofinternationally agreed rules and disciplines, still need to be tackled. The Commission remains firmlycommitted to addressing these through the appropriate channels (bilateral, plurilateral and multilateral)particularly as the reinforcement of efforts to resolve bilateral trade issues and disputes is essential to theconfidence-building process which is an integral part of the NTA.

Moreover, a number of worrying new impediments to EU exports to, and investments in, the US have arisensince the last annual report. One recent and very alarming example is the “carousel” legislation signed intolaw on 18 May this year. Other important obstacles that have to be stressed are restrictions on access to theUS satellite communications market. Furthermore, the implementation of the Understanding reached at theEU-US Summit in May 1998 with a view to resolving differences over US extraterritorial sanctions legislationremains stalled in the absence of US Congressional legislation to amend Title IV in the Helms-Burton Act.

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The report should also be seen in the context of the broader policy initiative to improve access to foreignmarkets for European exports. As part of this, the Commission has set up an extensive electronic MarketAccess Database available to the public on the Internet (http://mkaccdb.eu.int) (additional material on EU-USrelations, as well as the Trade Barriers Report itself is available athttp://europa.eu.int/comm/external_relations/us/intro/index.htm). The Database provides market accessinformation in the broadest sense, including economic and regulatory information, tariff levels as well asanalyses of trade issues. For readers, this facilitates access throughout the year to on-line updates of thematerial contained in the published report as well as to the additional background information that is includedin the database.

It is to be hoped that, as a means of identifying problems of access to and of operating in US markets, theCommission services’ Report will continue to play a useful role in focusing dialogue and negotiations -- bothmultilateral and bilateral -- on the elimination of obstacles to the free flow of trade and investment. TheReport has taken into account developments until the beginning of July 2000. Any comments should beaddressed to the Unit for Relations with the United States of America, Directorate General for ExternalRelations, European Commission, 200 rue de la Loi, 1049 Brussels (fax: +32.2.299.02.08).


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Summary

Extraterritoriality The EU strongly opposes the extraterritorial provisions of certain US legislation,which hamper international trade and investment by seeking to regulate EU tradewith third countries conducted by companies outside the US. Of particular concernat the present time are the Helms-Burton Act and the Iran Libya Sanctions Act.Important headway towards a lasting solution to this dispute was made at the 18May 1998 EU/US Summit in London. However, implementation of theUnderstanding reached at that occasion continues to depend on US Congresslegislative action.

Unilateralism Unilateralism in US trade legislation also remains a matter of concern. Whilst theUS has in practice made extensive use of the WTO dispute settlement system, itretains the opportunity to take unilateral trade measures. Recently the EU has wontwo dispute settlement cases before the WTO, one against the suspension of customsliquidation in the banana dispute, and one against Sections 301 to 310 of the US1974 Trade Act. The EU has also initiated dispute settlement proceedings againstthe “carousel” legislation signed into law on 18 May 2000 (section 407 of the Tradeand Development Act of 2000).

Tariff barriers Tariffs have been substantially reduced in successive GATT rounds. As a result,the EU’s concern is now focused on a relatively limited number of US “peaks” andother significant tariffs where less progress has been made.

Other customsbarriers

EU exports also face a number of additional customs impediments, such as thecustoms user fees and the excessive invoicing requirements on importers, which addto costs in a similar way to tariffs. The US also changed in 1996 its origin rulesgiving rise to specific problems for various EU textile and clothing products that areno longer able to claim their national origin, but this problem is almost resolved as aresult of the imminent adoption of new rules of origin. The EU is also veryconcerned about the discriminatory nature of the US Harbour Maintenance Tax,levied on waterborne imports in all US ports. In March 1998 the EU requestedWTO dispute settlement consultations and is not satisfied with alternative legislationintroduced in the US Congress.

Trade defenseinstruments

A WTO panel established in January 1999 after an investigation under the TradeBarrier Regulation has ruled that the 1916 US Antidumping Act is in contradictionwith the WTO Anti-dumping Agreement and GATT 1994. The WTO AppellateBody has also condemned on 10 May2000 the countervailing duties maintainedafter the arm’s length privatisation of the British Steel company, thereby rejectingthe methodology followed by the US Department of Commerce. The EU has alsobeen active against the abusive recourse by the US to the safeguard instrument, inparticular in the wheat gluten case. Regulations restricting exports, perceived ashindering trade for third parties, are also a matter of concern.

Technical barriers totrade

EU exporters continue to face a number of behind-the-border impediments. Theproliferation of regulation at State level presents particular problems for companieswithout offices in the US. In addition, some federal standards differ frominternational norms meaning that manufacturers cannot directly export to the USproducts made to EU standards (normally based on international standards). Otherrelated difficulties concern labelling requirements and excessive reliance on third-party certification. The FDA drug approval procedures continue to give non-USbased firms difficulties. In the agricultural area, a number of sanitary and


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phytosanitary issues remain a significant source of difficulty for the EU, althoughsome of these may be solved by the Veterinary Equivalence Agreement, signed on 20July 1999.

Governmentprocurement

Even before the Uruguay Round was ratified, the EU and US had concludednegotiations on a further bilateral procurement agreement that improves on theprovisions of the WTO Government Procurement Agreement. These twoagreements increased substantially the bidding opportunities for the two sides.However, the EU remains concerned about the wide variety of Buy Americaprovisions that persist, and to which are being added others for federally fundedinfrastructure programmes. Small business set-aside schemes also limit biddingopportunities for EU contractors in a substantial manner. The EU also opposes sub-federal selective purchasing legislation, restricting the ability of EU and othercompanies doing business with specific countries to bid for contracts in variousStates and cities. Apart from other actions, the EU considers that an increase in thecoverage of the US GPA offer (and in particular the elimination of the existingexceptions) would contribute to an improvement of this situation.

Aeronautics industry Despite the existence of the 1992 EC-US Large Civil Aircraft agreement the EUremains concerned about the level of indirect support to US aircraft manufacturers.This is also an area for multilateral action, and progress needs to be made on theCivil Aircraft Agreement that remains stalled in the WTO.

Shipbuilding The 1994 OECD Shipbuilding Agreement which aims at regulating unfair practices,measures of support and injurious pricing still cannot enter into force due to theabsence of the US ratification of the Agreement. The maintenance of a number ofUS subsidies, protective legislation and tax policies, remain a matter of concern.

National securityrestrictions

Although the principle of national security has a long tradition in trade policy, theEU has repeatedly expressed concern about its excessive use by the US as adisguised form of protectionism, particularly in relation to the application of import,procurement and investment restrictions, as well as the extraterritorial application ofexport restrictions. In particular, the 1988 Exon-Florio amendment and followinglegislation to restrain foreign investment in, or ownership of, businesses relating tonational security has proved to be problematic. However, the absence of a cleardefinition of “national security” has led to an overly wide interpretation of the term.

Conditional nationaltreatment

Furthermore, the provision of conditional national treatment in various US laws, andnotably in the area of science and technology research remains troublesome.

Tax measures Concerns about federal tax measures focus on the nature of reporting requirementsand the specific manner for calculating what is due. The EU deems State “world-wide” unitary taxes as inconsistent with US obligations under its tax treaties withthird countries. Foreign Sales Corporations (FSC) legislation remains a matter ofmajor concern, and the WTO Appellate Body recently affirmed in a report of 24February 2000 that the FSC is incompatible with the WTO Subsidies Agreementand the Agreement on Agriculture. The EU is closely monitoring the evolution ofthis case and in particular how the US will implement the WTO ruling by 1 October2000.

Intellectual property Despite a number of positive changes in US legislation following Uruguay Roundcommitments, problems remain due to discrepancies between US legislation and


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other international commitments. In addition, the issue of informing right-holders ofgovernment use of patents as well as various others related to appellations of origin,geographical indications, copyright, trademarks and patent protection have not beenresolved. The Community and its Member States recently won a WTO DisputeSettlement case regarding obstacles to the licensing of music works in the US(section 110(5) of the US Copyright Act), but it remains to be seen how the US willimplement the panel’s recommendations. The protection of trademarks in the US,notably those stemming from Cuban origin, also raises concerns in respect of thecompatibility with the TRIPs Agreement. Moreover, the co-existence offundamentally different patent systems (US first-to-invent system versus first-to-filesystem followed in the rest of the world) continues to create considerable interfaceproblems for EU companies.

Communicationservices

The GATS Basic Telecommunications Agreement concluded in 1997 and in forcesince February 1998 has led to significant commitments on market access.Nonetheless, the EU remains concerned about the considerable barriers and hurdlesthat European and foreign-owned firms wishing to get access to the US market arestill facing (e.g. investment restrictions, lengthy proceedings, conditionality ofmarket access, and reciprocity-based procedures). An important obstacle isrepresented by the current restrictions on access to the satellite communicationsmarket in the US, though problems also exist in a number of other areas. Thissituation is not in line with the open market access policy advocated by the US andprovides a competitive advantage to the significant number of US companies whichhave already access to the European market in this field.

Air transportservices

A number of issues continue to create problems including foreign ownershiprestrictions and air security regulations.

Professional servicesThe implementation of the GATS schedules for professional services has resulted insome improvement in market access. However, a number of problems, especiallydue to regulation at the State level, remain to be tackled in order to secure moretransparent and open access to the US market.

Maritime services The EU was disappointed that the extended WTO GATS negotiations on maritimetransport, during which the US never tabled an offer, could not be brought to asuccessful conclusion. In the US foreign-built vessels are prohibited from engagingin (direct or indirect) coastwise trade (Jones Act), and cannot be documented andregistered for dredging, towing or salvaging. In addition, there has been no progresson the elimination of requirements that cargoes generated by US Federalprogrammes are shipped on US-flagged ships.


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TABLE OF CONTENTS

FOREWORD……………………………………………………………………………………………………………….iSUMMARY ………………………………………………………………………………………………………..……...iii

1. INTRODUCTION .............................................................................................................................................1

1.1 TRANSATLANTIC CO-OPERATION......................................................................................................................11.2 THE ECONOMICRELATIONSHIP.........................................................................................................................3

Trade in goods..................................................................................................................................................................3Trade in services ..............................................................................................................................................................4Investment links ...............................................................................................................................................................5

2. GENERAL FEATURES OF US TRADE POLICY .........................................................................................8

Problem areas: Extraterritoriality......................................................................................................................................8Unilateralism .................................................................................................................................................................10

3. TARIFF BARRIERS ....................................................................................................................................... 14

3.1 APPLIEDTARIFF LEVELS................................................................................................................................. 14Tariff peaks....................................................................................................................................................................14The Information Technology Agreement .........................................................................................................................14

Spirits ............................................................................................................................................................... 14Banana dispute................................................................................................................................................. 14Ceramics and Glass .......................................................................................................................................... 15Textiles and Leather.......................................................................................................................................... 15Jewellery........................................................................................................................................................... 15

3.2 TARIFF QUOTAS............................................................................................................................................. 16Agriculture and Fisheries.................................................................................................................................. 16

4. NON-TARIFF BARRIERS ............................................................................................................................. 17

4.1 REGISTRATION, DOCUMENTATION, CUSTOMSPROCEDURES............................................................................. 17Excessive invoice requirements ......................................................................................................................................17

Textiles and Leather.......................................................................................................................................... 17Customs formalities........................................................................................................................................................17Origin rules....................................................................................................................................................................17

Agriculture and Fisheries.................................................................................................................................. 184.2 LEVIES AND CHARGES(OTHER THAN IMPORTDUTIES)..................................................................................... 18

User fees ........................................................................................................................................................................18Harbour Maintenance Tax and Harbour Services Fee......................................................................................................19

Automotive........................................................................................................................................................ 19Shipbuilding...................................................................................................................................................... 20

4.3 IMPORTPROHIBITIONS ................................................................................................................................... 20National security based restrictions.................................................................................................................................20

Agriculture and Fisheries.................................................................................................................................. 21Tuna-Dolphin.................................................................................................................................................................21Drift net fishing..............................................................................................................................................................22Shrimp ...........................................................................................................................................................................22Dairy products................................................................................................................................................................22

4.4 IMPORTQUOTAS............................................................................................................................................ 23Fisheries ........................................................................................................................................................... 23

Allocations to foreign fishing fleets.................................................................................................................................234.5 STANDARDS AND OTHERTECHNICAL REQUIREMENTS...................................................................................... 24


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Complex regulatory system.............................................................................................................................................24Non-use of international standards..................................................................................................................................24Fastener Quality Act.......................................................................................................................................................25Nutrition labelling..........................................................................................................................................................25Excessive reliance on mandatory certification ................................................................................................................25Regulatory differences at State level ...............................................................................................................................25Labelling requirements...................................................................................................................................................26

Automotive........................................................................................................................................................ 26Pharmaceuticals ............................................................................................................................................... 27

Approval procedures for drugs and drug ingredients........................................................................................................27Textiles and Leather.......................................................................................................................................... 27

Marking requirements ....................................................................................................................................................27Agriculture and Fisheries.................................................................................................................................. 28

Wine labelling................................................................................................................................................................28Sanitary and phytosanitary issues delays at customs controls...........................................................................................28Canned peaches..............................................................................................................................................................28Apples and pears ............................................................................................................................................................28Pathogen free regions .....................................................................................................................................................28Potted plants ..................................................................................................................................................................29Hardy nursery stocks ......................................................................................................................................................30BSE ...............................................................................................................................................................................30Goats..............................................................................................................................................................................30Recognition of the Community........................................................................................................................................30Regionalisation...............................................................................................................................................................30Non-recognition of disease-free status.............................................................................................................................31Non-comminglement ......................................................................................................................................................31Uncooked meats .............................................................................................................................................................31Egg products ..................................................................................................................................................................31Canned food ...................................................................................................................................................................31

4.6 GOVERNMENT PROCUREMENT........................................................................................................................ 31Federal Buy America legislation.....................................................................................................................................31National security issues ..................................................................................................................................................32Other indirect barriers ....................................................................................................................................................34Sub-federal selective purchasing laws.............................................................................................................................34State Buy America legislation and restrictions ................................................................................................................34Set-aside for small businesses.........................................................................................................................................35Berry Amendment ..........................................................................................................................................................36MoU undermined...........................................................................................................................................................36Bearings.........................................................................................................................................................................38

Iron, Steel and Non-Ferrous Metals.................................................................................................................. 38Telecom Equipment........................................................................................................................................... 38

Sanctions........................................................................................................................................................................38EC Actions in the context of the WTO Agreement on Government Procurement (GPA) .................................................38

4.7 TRADE DEFENSEINSTRUMENTS...................................................................................................................... 391916 Antidumping Act...................................................................................................................................................39Safeguard measure on steel wire rod...............................................................................................................................39Safeguard measure on welded line pipe ..........................................................................................................................39Sunset reviews on countervailing duties..........................................................................................................................40Countervailing duties on pasta from Italy........................................................................................................................40

Agriculture and Fisheries.................................................................................................................................. 40Safeguards on imports of wheat gluten............................................................................................................................40

Iron, Steel and Non-Ferrous Metals.................................................................................................................. 40Countervailing duties on certain hot-rolled lead and bismuth carbon steel products originating in the UK .......................41

4.8 EXPORTRESTRICTIONS.................................................................................................................................. 41Export controls ...............................................................................................................................................................41Satellites ........................................................................................................................................................................41Encryption......................................................................................................................................................................42

4.9 SUBSIDIES...................................................................................................................................................... 43Aircraft ............................................................................................................................................................. 43

LCA Agreement .............................................................................................................................................................43Support from the NASA aeronautics budget....................................................................................................................44


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Supersonic aircraft programme .......................................................................................................................................44Active support from the Administration and Congress.....................................................................................................44

Shipbuilding...................................................................................................................................................... 44OECD Shipbuilding Agreement......................................................................................................................................44Subsidies........................................................................................................................................................................45Loan guarantees .............................................................................................................................................................45

Agriculture and Fisheries.................................................................................................................................. 46Export Enhancement Program.........................................................................................................................................46

5. INVESTMENT RELATED MEASURES ...................................................................................................... 47

5.1 DIRECT FOREIGNINVESTMENT LIMITATIONS ................................................................................................... 47National security considerations: the Exon-Florio provisions...........................................................................................47Uncertainties about implementation................................................................................................................................47Foreign ownership restrictions........................................................................................................................................48Conditional National Treatment......................................................................................................................................48Performance requirements ..............................................................................................................................................48Public Subsidies .............................................................................................................................................................48

5.2 TAX DISCRIMINATION .................................................................................................................................... 49Cumbersome and discriminatory reporting requirements.................................................................................................49“Earnings stripping” provisions ......................................................................................................................................49Internationally agreed approach overlooked ....................................................................................................................49State unitary income taxation: arbitrary calculations........................................................................................................50World-wide unitary taxation ...........................................................................................................................................50Foreign Sales Corporations.............................................................................................................................................50

Aircraft ............................................................................................................................................................. 51

6. INTELLECTUAL PROPERTY RIGHTS ..................................................................................................... 52

6.1 COPYRIGHT AND RELATED AREAS................................................................................................................... 52Moral rights ...................................................................................................................................................................52Cross-border licensing of music works............................................................................................................................52

6.2 APPELLATIONS OFORIGIN AND GEOGRAPHICALINDICATIONS .......................................................................... 53Inadequate protection of geographical indications of wines and designations of spirits ....................................................53Incomplete BATF list of non-generic names....................................................................................................................53Semi-generic names........................................................................................................................................................53Grape names ..................................................................................................................................................................53Spirits ............................................................................................................................................................................54

6.3 PATENTS, TRADEMARKS AND RELATED AREAS................................................................................................. 54Measures affecting imported goods.................................................................................................................................54Government use .............................................................................................................................................................54First to file system..........................................................................................................................................................55Section 211 of the US Omnibus Appropriations Act........................................................................................................55Patentability of software and business methods...............................................................................................................55

7. SERVICES ...................................................................................................................................................... 56

7.1 BUSINESSSERVICES....................................................................................................................................... 56Professional Services........................................................................................................................................ 56

New GATS disciplines ...................................................................................................................................................56Problems at State level ...................................................................................................................................................56Improving outlook?.........................................................................................................................................................56

7.2 COMMUNICATION SERVICES........................................................................................................................... 56US commitments under the WTO Basic Telecom Agreement..........................................................................................56Satellite Services............................................................................................................................................................57Mobile communications..................................................................................................................................................59Radio communications....................................................................................................................................................59Foreign investment .........................................................................................................................................................60Universal Service ...........................................................................................................................................................60Digital terrestrial television ............................................................................................................................................60Internet domain names and cybersquatting......................................................................................................................60Encryption......................................................................................................................................................................61

7.3 FINANCIAL SERVICES..................................................................................................................................... 61WTO Financial Services negotiations .............................................................................................................................62


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Banking ............................................................................................................................................................ 62Sectoral segmentation and access to new financial powers for financial holding companies .............................................62Debanking problems.......................................................................................................................................................63Geographical segmentation and establishment issues ......................................................................................................63

Insurance .......................................................................................................................................................... 63Links to banks................................................................................................................................................................63

Securities .......................................................................................................................................................... 64Establishment problems..................................................................................................................................................65Reciprocity requirements ................................................................................................................................................65

7.4 TRANSPORTSERVICES.................................................................................................................................... 65Air Transport Services ...................................................................................................................................... 65

Computers reservation systems.......................................................................................................................................65Foreign ownership of air carriers ....................................................................................................................................65Hatch amendment...........................................................................................................................................................65Aircraft Repair Stations..................................................................................................................................................66Fly America Act .............................................................................................................................................................66Leasing ..........................................................................................................................................................................66

Maritime Transport Services............................................................................................................................. 66Coastwise trade ..............................................................................................................................................................66Cargo preferences measures............................................................................................................................................67

LIST OF FREQUENTLY USED ABBREVIATIONS…………………………………………………………………………...68


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1. INTRODUCTION

1.1 Transatlantic Co-operation

The NewTransatlanticAgenda

The New Transatlantic Agenda (NTA) and the accompanying Joint EU-USAction Plan, adopted at the EU-US Summit in Madrid on 3 December 1995,provide an innovative and flexible political basis for transatlantic relationsby moving the relationship from one of consultation to one of joint action.The NTA contains a range of commitments in areas such as foreign andsecurity policy, international crime, drug trafficking, migration, environmentand health, as well as with regard to increasing transatlantic contacts at thelevel of the citizen (“Building bridges across the Atlantic”). There is also asubstantial chapter on economic and trade issues (“Contributing to theexpansion of world trade and closer economic relations”).

Bonn Declaration In the Bonn Declaration adopted at the 21 June 1999 EU-US Summit inBonn, both sides committed themselves to a "full and equal partnership" ineconomic, political and security affairs. This explicit recognition is a stepforward from the NTA document. The Bonn Declaration outlines how theEU and the US want to shape their relationship over the next decade and isembedded in the NTA process.

NTA achievements Significant progress has been made since 1995, with the signature at the EU-US Summit of May 1997 in the Hague of the Agreement on CustomsCooperation and Mutual Assistance in Customs Matters; the entering intoforce on 1 December 1998 of the Mutual Recognition Agreement coveringspecific goods areas (telecom equipment, pharmaceuticals, medical devices,electromagnetic compatibility, electric safety and recreational craft); the EU-US Veterinary Equivalence Agreement aimed at facilitating trade in liveanimals and animal products and signed on 20 July 1999; the signature on 4June 1998 of the EU-US Agreement on the application of positive comityprinciples in the enforcement of their competition laws; the Science andTechnology Agreement signed on 5 December 1997, which extends andstrengthens the conduct of co-operative activities between EU scientificinstitutions and a range of US government research agencies. At the EU-US Summit in Lisbon 31 May 2000, the Consultative Forum onBiotechnology was launched. This independent forum will contributetoward fostering better understanding of the many important issues involvedin biotechnology. At the Lisbon Summit, Leaders also could registerconsiderable progress on the so called “Safe Harbour Principles” for theadequate protection of personal data transfers.

The economic relationship between the EU and the US is of vital importanceto both. The EU and the US are each other’s single largest trading partner.The EU and US have by far the world's most important bilateral investment


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relationship, and they are each other's most important source and destinationfor foreign direct investment (see Chapter 1.2 for detailed figures).

Despite this healthy economic relationship, transatlantic trade andinvestment remain hampered by a significant number of impediments,mainly of a non-tariff kind. The NTA gave renewed impetus to addresssome of these issues. In particular, the NTA commits the EU and the US,without detracting from the existing co-operation in multilateral fora, toprogressively reduce or eliminate barriers that hinder the transatlantic flowof goods, services and capital.

The TransatlanticEconomicPartnership

This commitment under the NTA led to the adoption of a joint statement onthe Transatlantic Economic Partnership (TEP) at the May 1998 LondonSummit. The TEP includes both multilateral and bilateral elements. Thecore bilateral element of TEP is to tackle those trade issues - mainlyregulatory barriers - which are now the main obstacle to transatlanticbusiness, while preserving a high level of protection for health, safety,consumers and the environment. At the same time, TEP is designed tostimulate further multilateral liberalisation, by establishing closer EU-US co-operation on the preparations for new multilateral negotiations in the WTO.An innovative aspect of TEP is the joint determination to integrate labour,business, environmental and consumer issues into the process.

At the beginning of November 1998, an Action Plan, with target dates, wasagreed with the US Administration. The implementation of the Plan has sofar yielded some useful results. However, it must be said that we have notcome as far as we had expected when we set out the plan andimplementation has been slower and more cumbersome than we thought.We are now giving new impetus to the process and have set out concretegoals to be achieved by the next Summit. These are common guidelines forregulatory cooperation, extended MRAs in the goods sector, expanding toMRAs to certain service sectors and to accomplish certain joint projects onbiotechnology.

Early warning andproblem prevention

The large number of high-profile EU-US trade disputes that have erupted inrecent years has produced a widespread public perception that EU-USrelations are mainly characterised by trade disputes. This is not the case.Such disputes touch only a minimal percentage (less than 2%) of anotherwise very healthy two-way trade flow. However, more differences arebound to arise between the EU and the US due to increasing interdependencebetween the world’s two major markets and often diverging domestic rules.These rules are frequently based on very different societal values andsensitivities as regards health, consumer and environmental protection.There are, nevertheless, legitimate expectations both among EU and UScitizens and economic operators that the two sides should strengthen theircapacity to properly manage differences.

The Bonn EU-US Summit on 21 June 1999 agreed on a set of principles,using the existing mechanisms established under the NTA and the TEP, forrendering early warning more effective in future. It is the common aim toidentify and prevent problems at an early stage, in order to prevent conflictsand facilitate their resolution before they risk undermining the much broader


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EU-US relationship. This does not guarantee the resolution of problems, butshould constitute a serious effort to take each side’s interests into accountwhen taking policy, legislative or regulatory decisions. We are now in theprocess of making these principles functioning in practice and there certainlystill remains some fine-tuning to be done.

1.2 The Economic Relationship

Transatlantic economic relations are underpinned by the most important tradeand investment links in the world. Such links have grown particularly stronglyover the last few years, to the benefit of both economies. Taking goods andservices together, the EU and the US are each other’s largest single tradingpartner, with a two-way flow of more than 490 billion EURO in1999.Similarly, the two sides remain each other’s most important source anddestination for foreign direct investment with a combined stock of over 742billion ECU in 1998. This section briefly reviews the data on EU-US trade andinvestment and places it in a global context (all EU data include the three newMember States unless otherwise indicated).

Trade in goodsTrade in goods (exports plus imports) between the 15 Member States of theEU and the US reached 337 billion EURO in 1999, with an increase of 12% forexports and 3,4% for imports over the previous year. After the EU registereda substantial trade deficit with the US for three consecutive years from 1990 to1992, between 1993 and 1997 bilateral trade was almost in equilibrium. TheEU recorded a surplus of 0.8 billion ECU in1993 and 3.6 billion ECU in 1994,a small deficit of 0.4 billion ECU in1995 and again a small surplus of 1.6 and3.5 billion ECU in1996 and 1997 respectively. EU trade data for 1998 and1999 show a wider EU surplus of about 9.6 and 23,4 billion ECU respectively.

The US is the EU’s single largest trading partner, accounting for 20.3% in totalEU-imports and 23.8% in total EU-exports in 1999. Likewise, the EU is themain US partner for imports and the second largest market for US exports(after Canada), accounting for 22% of US exports and 19.3% of US imports in1998.

The EU and the US are the world’s most important traders. The EU’s share intotal world trade (excluding intra-EU trade) amounted to 18.5% in 1998(19.2% for exports and 17.7% for imports); with the share of the US alsoamounting to 18.5% (15.9% for exports and 20.7% for imports). Taking onlybilateral EU-US trade, it represents more than 7.1% of total world trade. Thisis equal to the share of US-Canada bilateral trade. Trade between the US andJapan represented 4.2% of total world trade in 1998.


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Source: Eurostat, Comext database.

Transatlantic trade is increasingly characterised by high intra-industry tradeintensities, especially for manufactured goods, and high levels of intra-firmtrade. WTO estimates show that US-EU intra-industry trade intensities grewfrom a value of 39% in 1980, to 57% in 1995, an indication of an increasingspecialisation within product categories to capture economies of scale. Intra-firm trade accounted for more than 45% of US merchandise imports from theEU and 37% of EU imports from the US in 1993, demonstrating the important“pull” effect on trade from foreign direct investment by US and EU affiliates ineach other’s markets.

Transatlantic trade is also heavily concentrated in sophisticated high technologyproducts and, increasingly, in services. It is estimated that trade in high-technology products accounts for 20% of total EU/US merchandise trade. Forboth partners, transatlantic trade accounts for a large share of their total tradein high tech goods (34% for the EU and 25% for the US).

Trade in servicesTrade in services between the EU and the US is rapidly gaining importance. In1998 EU-US total turnover in services reached 157 billion ECU (79.4 billionECU for EU’s exports and 77.7 billion ECU for its imports), with a decreaseof 1.7% for exports and increase of 6.7% for imports over the previous year.The EU recorded a small trade surplus of 1.7 billion ECU vis-à-vis the US in1998, against a bigger surplus of 8 billion ECU in 1997.

EU(12)-US bilateral trade in services grew more rapidly than bilateralmerchandise trade in the period 1985-1992, with the relative ratio increasingfrom 54% to 65%. The trend has since reverted, and in 1998 EU-US servicestrade amounted to 49.6 % of total turnover in bilateral merchandise trade.

EU - US TRADE IN GOODS: 1990-1999

-20

30

80

130

180

230

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

EU exports to US

EU imports from US

Balance

ECU/EURO


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Source: Eurostat, NewCronos Database.

Notwithstanding the latter developments, in 1998, while the EU accounted for20% of US merchandise trade, more than 33% of US trade in services waswith the EU. Similarly, in 1998 the US accounted for 21.6% of extra-EU tradein goods, but for 34.4% of extra-EU trade in services. These trends comparewith much lower values for trade in services with other major trade partners.

Also for services trade the EU and the US are the world’s most importanttraders. In 1997 the EU was the world's largest exporter and importer,accounting for 24.3% and 23% respectively of world commercial servicesexports and imports. US shares accounted for 22.5% and 15% respectively ofthe world total.

Investment linksThe EU and the US have by far the world’s most important bilateral investmentrelationship and are each other’s largest investment partner. The US marketremained the main destination of EU foreign direct investment (FDI) with anaverage share of 50% between 1993 and 1998. Outflows from the EU to theUS accounted for 112.3 billion ECU in 1998 or 59% of total EU outwardflows thus increasing dramatically in value on the previous years. The USattracted 41% (36.9 billion ECU) of EU outward FDI flows in1997, 36%(17.2 billion ECU) in1996, 54% (24.5 billion ECU) in 1995, 31% (7.4 billionECU) in 1994, 57% (13.8 billion ECU) in 1993 and 39% (6.9 billion ECU) in1992.

EU - US TRADE IN SERVICES: 1992-1998

0

10

20

30

40

50

60

70

80

90

1992 1993 1994 1995 1996 1997 1998

EU exports to US

EU imports from US

Balance

Bn ECU


6

The strong FDI links between the EU and the US are confirmed by the amountof US investment into the EU. Over the period 1993-1998, the US was the topcontributor to extra-EU inflows with an average share of 62%. In 1998, 69%(61.7 billion ECU) of extra-EU inflows came from the US. In1997, 54%(20.7 billion ECU) of extra-EU inflows originated in the US, against 56% (15.9billion ECU) in 1996, 65% (24.3 billion ECU) in 1995, 47% (10.3 billion ECU)in 1994, 53% (11.3 billion ECU) in 1993 and 54% (12.3 billion ECU) in 1992.

Source: Eurostat,. FDI data do not include reinvested earnings.

Looking at FDI stocks in the EU and the US, the importance of theTransatlantic investment relationship is also evident. By 1998, crossinvestment stocks between the EU and the US on a historical-cost basisreached 742 billion ECU, by far the world’s largest investment relationship.EU investment in the US was valued at 410 billion ECU, while the USinvestment in the EU was estimated at 332 billion ECU. As with the bilateraltrade relationship, investment stocks are both balanced and substantial. Theyhave also been growing very quickly over the past few years, doubling between1989 and 1996.

EU FDI FLOWS ABROAD: 1992-1998

0

25

50

75

100

125

150

175

200

1992 1993 1994 1995 1996 1997 1998

0%

10%

20%

30%

40%

50%

60%

70%

Total EU outward FDI

EU FDI flows into the US

Per cent of total

Bn ECU


7

Source: Eurostat,. FDI data do not include reinvested earnings.

Once again, the EU and the US are each other’s largest partner. The EU is byfar the biggest investor in the US accounting for 59.3% of total FDI stock inthat country by 1998. The EU share has also been steadily increasing over thepast decade. Likewise, the most important FDI market for the US is the EU.In 1998, 44.2% of US FDI stock was located in the EU.

The investment relationship is impressive also when analysed from an EUperspective. At the end of 1998, 48.3% of EU FDI assets outside the Unionwere invested in the US, and 59.8% of the EU FDI liabilities were owned byUS investors.

Foreign Direct Investment, 1998

US in the EU EU in the US

FDI Stocks

Bn ECU 331.8 410.4

Direct Investment Position(in percentages, 1998)

As % of total US DI abroad as % of FDI in the EU fromabroad

US stock in the EU 44.2% 59.8%

as % of FDI in the USfrom abroad

as % of total EU DI abroad

EU stock in the US 59.3% 48.3%

Sources: Eurostat.

FDI FLOWS INTO THE EU: 1992-1998

0

10

20

30

40

50

60

70

80

90

100

1992 1993 1994 1995 1996 1997 1998

0%

10%

20%

30%

40%

50%

60%

70%

80%

Total EU inward FDI

US FDI flows into the EU

Per cent of total

Bn ECU


8

2. GENERAL FEATURES OF US TRADE POLICY

The US Administration has stressed that its trade policy is based on the values ofopenness, transparency and the respect for the rule of law. These are principles towhich the EU also firmly subscribes. Both regard the WTO as a fundamentalelement in achieving a world of open markets. Bilaterally, this shared commitmenthas contributed to the adoption of the NTA and has fostered the development of ahealthy economic relationship. But despite this reinforced cooperation, there remaintwo particular tendencies in US trade policy which are sources of concern to the EU.

Problem areas:Extraterritoriality

The first is extraterritoriality. This is a long-standing feature of the US legal systemmanifesting itself in - amongst others - the fields of the environment, banking, taxand export control. While the EU may share some of the objectives underlying suchlaws, it is opposed, as a matter of law and principle, to the extraterritorial applicationof domestic legislation insofar as it purports to force persons present in - andcompanies incorporated in - the EU to follow US laws or policies outside the US andto the extent that it serves only to protect US trade or political interests. Inparticular, the EU opposes the extraterritorial provisions of certain US legislationthat hampers international trade and investment by seeking to regulate EU trade withthird countries conducted by companies outside the US.

On 12 March 1996, President Clinton signed into law the Cuban Liberty andDemocratic Solidarity (Libertad) Act of 1996 (referred to as the “Helms-BurtonAct”). This is the latest in a series of legislative initiatives since the US proclaimed atrade embargo against Cuba in 1962 (Section 620 (a) of the Foreign Assistance Actof 1961; further reinforced by the Food Security Act of 1985 and the CubanDemocracy Act of 1992).

The EU is of the view that these measures are in part, contrary to US obligationsunder the WTO Agreements, in particular the GATT (General Agreements on Tariffsand Trade) and GATS (General Agreements on Trade in Services).

On 5 August 1996, the Iran and Libya Sanctions Act (referred to as “ILSA”) wassigned into law. The legislation provides for mandatory sanctions against foreigncompanies that make an investment above US$ 20 million contributing directly andsignificantly to the development of petroleum or natural gas in Iran and Libya. Inaddition, mandatory sanctions are also applicable against companies that violate theUN Security Council trade sanctions against Libya.

As a consequence, since the original bills were passed, the EU has forcefullyexpressed, through a number of representations and démarches, its opposition to thiskind of legislation - or any secondary boycott and sanction legislation havingextraterritorial effects. In particular, with regard to the Helms-Burton Act, the EUand its Member States initiated a WTO dispute settlement procedure on 3 May 1996.

Furthermore, on 22 November 1996, the EU adopted Council Regulation 2271/96,with a view to protecting the EU and its economic operators, against the effects ofextra-territorial legislation of this sort adopted by third countries. Other tradingpartners of the US, such as Canada and Mexico, have strengthened or adoptedsimilar blocking legislation.


9

On 11 April 1997 an Understanding was reached with the US concerning the Helms-Burton Act, the ILSA and the EU’s WTO case regarding the former. TheUnderstanding charted a path towards a longer-term solution through the negotiationof international disciplines and principles for greater protection of foreign investment,combined with the amendment of the Helms-Burton Act. As regards ILSA theUnderstanding stipulated that “the US will continue to work with the EU toward theobjectives of meeting the terms” under the legislation which would permit the USPresident to waive the application of sanctions for EU Member States andcompanies. The EU agreed to suspend its WTO case, but reserved the right torestart or to re-establish the panel if action is taken against EU companies orindividuals under Helms-Burton or ILSA, or waivers as described in theUnderstanding were not granted, or were withdrawn.

At the 18 May 1998 EU-US Summit in London, the EU and the US reached anagreement on a package of measures to resolve a dispute regarding the Helms-BurtonAct and ILSA. The Summit deal offers the real prospect for a permanent solution –but still depends on acceptance by the US Congress before full implementation maytake place. The three main elements of the Summit deal are:

• first, an agreement on disciplines for investments into illegally expropriatedproperty;

• second, a US commitment to self-restraint on future extraterritorial legislationexpressed in an agreement on Transatlantic Partnership on Political Co-operation.

• third, an assurance for waivers for the EU and for EU companies under bothActs.

The agreement on investment disciplines addresses the issue of whether or notinvestment assistance agencies of the parties should give assistance to investmentprojects in illegally expropriated property. This agreement is a valuable step forwardin investment protection policy, which goes far beyond addressing the issue ofpossible illegal expropriations in Cuba.

The Understanding on Disciplines contains a clear commitment on the part of the USAdministration that it will seek from Congress the authority to grant a waiver fromTitle IV of the Helms-Burton Act (visa restrictions) without delay. It is important tonote that the EU will not apply the agreed disciplines until this waiver authority isexercised. In addition, with respect to Title III (submission of law suits against“trafficking in expropriated property”) of the Helms-Burton Act, not only does theUnderstanding provide for a US commitment to continue to waive the right to filelaw-suits until the end of this President’s term; the Understanding also contains aclear reference to the possibility of obtaining such a waiver on a permanent basis inthe light of the EU’s developing efforts to promote democracy and human rights inCuba.

The deal on Transatlantic Partnership on Political Co-operation should be seen inconjunction with the EU’s efforts to make the US Administration restrain its use ofunilateral sanctions with extraterritorial effects, so-called “secondary boycotts”. TheSummit agreement on this issue states that the US Administration will “not seek orpropose, and will resist, the passage of” such sanctions legislation.

Another element of the deal reached at the Summit relates to the ILSA. At the EU-US Summit, the US Administration did not grant the EU a multilateral regime waiver


10

as foreseen by the 11 April Understanding. However, the US determined undersection 9(c) of ILSA to waive the imposition of sanctions against TOTAL for itsinvestment in gas exploration in the South Pars field in Iran and the US expressed itsexpectation that similar cases would result in like decisions for EU companies.

As regards Libya, the Summit provided for a strengthening of the US commitment to“engage with the EU in a sustained process for consideration of waivers undersection 9(c) of ILSA to companies from the EU”.

The agreement reached at the Summit in no way softens the EU’s position that theHelms-Burton and ILSA Acts are contrary to international law. At no point in timedid the EU acknowledge the legitimacy of these Acts. We have fully reserved ourright to resume the WTO case against the Helms-Burton Act in the event of actionbeing taken against EU persons or companies under either this Act or ILSA or thewaivers not materialising. The agreements are of a political nature and do not in anyway lend any sort of validity to the illegal provisions of the US laws in question.

Full implementation depends on Congressional support, which the Administrationhas undertaken to do all it can to deliver but appears not to be forthcoming. But theEU and its Member States can only fulfil the European side of the deal once thepresidential waiver authority under Title IV of the Helms-Burton Act has beenadopted and exercised. In the meantime, the USG continues to investigate certain EUcompany’s investments in Cuba.

On 14 March 2000, the Iran Non-Proliferation Act (INPA) was signed into law. Itprovides for discretionary sanctions against foreign companies transferring to Irangoods, services and technology listed under the international export controlregimes, as well as any other item prohibited for export to Iran under US exportcontrol regulations, as potentially contributing to the development of weapons ofmass destruction. Reports to Congress identifying foreign entities liable tosanctions would be based on ‘credible information’ regarding the transfer.

This Act constitutes new extraterritorial legislation, for on the one hand, it allowsthe US Administration to apply its own sanctions to exports which are subject toEU Member State and EC export control regimes, while, on the other hand, itunilaterally expands the scope of export controls on EU exports beyond thosemultilaterally agreed upon. Its adoption is incompatible with the US commitmentunder the TPPC to resist the passage of extraterritorial sanction legislation.

EU concerns were repeatedly expressed in the run-up to the adoption of this Act.Taking these into account, President Clinton issued a statement at the time ofsigning the bill into law, undertaking to work with Congress in order to seek torationalise the reporting requirements on transfers deemed legal under theapplicable foreign laws and consistent with the multilateral export control regimes.We expect the Administration to enter soon in this negotiation with Congress torepeal the threat of sanctions against EU entities.

Several other instances and variations of US extra-territoriality can be found in, interalia, various environmentally-driven embargoes (see section on import prohibitions),export control legislation (see section on export restrictions) as well as, at the sub-federal level, selective purchasing laws (see section on government procurement).

UnilateralismThere is a second element in US trade policy-making about which the EU hasregularly complained: unilateralism. This tendency takes the form of either unilateralsanctions or retaliatory measures against “offending” countries, or companies. Thesemeasures are unilateral in the sense that they are based on an exclusive US


11

appreciation of the trade-related behaviour of a foreign country or its legislation andadministrative practice, without reference to, and sometimes in defiance of,multilaterally agreed rules. This approach casts doubt on US support for amultilateral rules-based system of addressing trade problems and can also lead tobilateral agreements with elements of discrimination.

The “Section 301” family of legislation provides a striking example of unilateraltrade legislation which has been used on numerous occasions against the EU.Section 301 of the 1974 Trade Act as amended by the Omnibus Trade andCompetitiveness Act of 1988 authorises the US Administration to take action toenforce US rights under any trade agreement and to combat those practices byforeign governments which the US government deems to be discriminatory orunjustifiable and to burden or restrict US commerce. In 1999, the USTR (UnitedStates Trade Representative) initiated seven new investigations, two of which weredirected against the EU (alleged French Government subsidies for avionicsequipment, subsequently dropped, and an EU regulation concerning geographicalindications for foodstuffs and agricultural products). On 1 May2000, USTR didnot initiate any new investigations against the EU.

The Omnibus Trade and Competitiveness Act of 1988 also introduced the so-called“Super 301” provision. “Super 301” is the name given to a special initiationprocedure for unfair foreign trade practice investigations following the Section 301procedure. Originally limited to 1989 and 1990, President Clinton issued anExecutive Order on Identification of Trade Expansion Priorities on 3 March 1994.Referring to the lapsed Super 301 provision, the Executive Order requires the USTrade Representative, on the basis of the information contained in the annualNational Trade Estimates Report to identify “priority” unfair trade practices from“priority” countries and self-initiate Section 301 cases against them. On 27September 1995, the President amended this Executive Order to extend it to calendaryears 1996 and 1997. After a lapse of more than one year, President Clintonrenewed Super 301 by Executive Order in March 1999, extending it until the end of2001. In addition, Title VII of the 1988 Omnibus Trade and Competitiveness Actrelating to the removal of government procurement barriers was renewed. Ratherthan identify any countries under Title VII for formal identification, USTR intends tomonitor countries and cases with the potential for future identification. On 1 May2000, USTR announced the successful resolution of German procurement decisionsin the heavy electrical sector, but added Germany’s so-called “sect-filter” purchasingrestrictions to the monitor list.

Furthermore, the 1988 Omnibus Trade and Competitiveness Act introduced a“Special 301” procedure targeting intellectual property rights protection outside theUS. Under Special 301 the USTR has created a “priority watch list” and “watchlist” to identify “priority” foreign countries that are deemed to deny adequate andeffective protection of intellectual property rights. Countries placed on the “prioritywatch list” are the focus of increased bilateral attention and USTR officially initiatesinvestigation procedures that may eventually result in unilateral trade measures. The“watch list” is reserved for those countries that do not protect US intellectualproperty or that deny market access to IPR-related industries. On 1 May 2000, as aresult of its annual Special 301 review, the EU, Italy, Ireland, and Greece wereplaced on the 2000 “priority watch list.” Furthermore, Denmark and Spain wereplaced on the “watch list”. The US warned that it would request a WTO panelconcerning ex parte search remedies in Intellectual Property enforcement actions in


12

Denmark “unless imminent progress is made”. Shortly after the Special 301 review,the Danish Government presented a draft bill to solve the problem.

Admittedly, the US has used its unilateral trade policy arsenal more sparingly sincethe WTO Agreement entered into force on 1 January 1995. This Agreement providesfor multilateral disciplines on a much-expanded range of economic activities(including, for instance, services, textile and clothing, agriculture and trade relatedintellectual property – TRIPS). It also establishes a much more effective disputesettlement system, which, in particular, makes it impossible for the losing party toblock adoption of the panel report or authorisation of suspension of concessions.The counter-part to this is that the Dispute Settlement Understanding (DSU)explicitly obliges parties to follow the multilateral dispute settlement procedures andto refrain from unilateral determinations of non-conformity and unilateral sanctions.

Until recently, for issues covered by the WTO, the US has generally refrained fromunilateral action, with the notable exception of the bananas case. There, in order tocomply with the time limits imposed by the Section 301 legislation, the US did notuse the obligatory procedure provided by the DSU to solve its disagreement with theEU over whether the new EU banana regime was in conformity with WTO rules.Instead, the US directly requested the WTO to authorise it to suspend concessionsagainst the EC, in violation of normal WTO procedures. On 19 April 1999 the USreceived WTO authorisation to suspend concessions for an amount of $191.4million. In response, the US compiled a list of products, which were subject to aconditional liability of100% custom duties. As a result of the Beef-Hormones case,the WTO authorised the suspension of concessions to the amount of $116.8 millionand a further list was compiled (of mainly agricultural products) subject also to aconditional liability of100% customs duties.

The reaction of the EU has been firm, but in full compliance with WTO rules. TheEU has initiated two dispute settlement actions before the WTO, one against thespecific US measures described above, and one against Sections 301 to 310 of the1974 Trade Act. The reason for challenging the legislation itself is that thislegislation mandates USTR to take this kind of unilateral action within time framesthat in certain cases cannot possibly comply with WTO rules. This is true, inparticular, for cases where the US should follow the procedure of Article 21.5 DSUto resolve disagreements over the WTO compatibility of measures taken by otherMembers to implement panel rulings. The Section 301 legislation simply does notpermit USTR to follow this multilateral, obligatory route.

A WTO panel has ruled on 8 November 1999 that the statutory language of Sections301 to 310 of the 1974 Trade Act was as such inconsistent with the rules of theWTO Dispute Settlement Understanding. Indeed, the panel stressed that the UStrade legislation was at odds with the predictability of the multilateral trading system.However, because the US administration through a Statement of AdministrativeAction had undertaken to always act in a manner consistent with the US obligationsunder the WTO, the panel concluded that as long as the undertaking was respected,no violation was taking place. The practical result of this ruling has been to makeSections 301-310 ineffective against WTO members.

The EU has also been extremely critical of the “carousel” legislation enacted on 18May 2000 (Section 407 of the Trade and Development Act of 2000). Thislegislation provides for a mandatory and unilateral revision of the list of productssubject to suspension of GATT concessions 120 days after the application of thefirst suspension and then every 180 days thereafter, in order to affect imports from


13

Members which have been determined by the United States not to haveimplemented recommendations made pursuant to a WTO dispute settlementproceeding. The EU believes that such type of shotgun legislation is fundamentallyat odds with the basic principles of the Dispute Settlement Understanding.

In addition, in cases where bilateral (as opposed to WTO) agreements are alleged tohave been violated, Section 301 is still regularly used as a unilateral trade policyinstrument. Under the various elements of Section 301 legislation, trading partnersare given no choice but to negotiate on the basis of an agenda set by the US, on thebasis of judgements, perceptions, timetables, and indeed, US legislation. World tradeproblems should not be solved through forced settlements based on a unilateraldetermination of unfairness, unilateral timetables, and the threat of unilateral tradeaction if no agreement is reached.


14

3. TARIFF BARRIERS

3.1 Applied Tariff Levels

Tariff peaksDespite the substantial tariff reduction and elimination agreed in the Uruguay Round,the US retains a number of significant duties and tariff peaks in various sectorsincluding food products, textiles, footwear, leather goods, jewellery and costumejewellery, ceramics, glass, trucks and railway cars.

The InformationTechnologyAgreement

With regard to information technology (IT) products, the Information TechnologyAgreement (ITA) providing for the complete elimination of tariffs by the year 2000on a large number of products was concluded in March 1997 and was implementedas of July 1997. The main elements of the new US tariff structure can besummarised as follows: elimination of tariffs on all semiconductors, computers,computer peripherals and computer parts, electronic calculators, telecommunicationequipment, electronic components (capacitors, resistors, printed circuits),semiconductor testing and manufacturing equipment and certain consumer electronicitems. Although tariffs on optical fibre cables will be eliminated under the ITA, theUS refused to do the same for optical fibres on which they maintain a rathersubstantial protection; also tubes for computer monitors are excluded from the tariffelimination. At the time of writing, attempts to broaden the scope and coverage ofproducts of the ITA in the form of the ITA II have so far failed.

Spirits Pursuant to the ITA agreement reached at the WTO Singapore MinisterialConference, the US eliminated duties on all spirits from 1 January 2000.

Banana dispute In a ruling from the World Trade Organisation (WTO) on 6 April 1999, variouselements of the EU’s revised banana import regime, which came into force on 1January 1999, were found to be inconsistent with WTO rules. The EU upholds theimportance of abiding by WTO rules, and is currently working on a new bananaregime which would be fully consistent with our WTO obligations, on the basis of aCommission proposal of July 2000. In this context, the EU has been engaged inintense discussions with the WTO Members concerned, in particular the US.

On 9 April 1999, USTR published a list of products, covering trade in an amount ofUS$ 191.4 million per year, on which the US imposed a retaliatory duty (ad valoremrate of 100%). The Member States affected were: Austria, Belgium, Finland,France, the Federal Republic of Germany, Greece, Ireland, Italy, Luxembourg,Portugal, Spain, Sweden and the United Kingdom.


15

As a result of the “carousel” legislation a new list is expected in the near future.

Beef Hormones dispute

The decision by a WTO panel of August 1997 that EC measures against hormones inbeef were not in compliance with WTO rules was submitted to the Appellate Body inSeptember 1997. The body overruled the earlier panel but recommended that the ECbring its measures into conformity with obligations under the SPS Agreement. TheArbitrator granted the Community a deadline of 13 May 1999 in which to implementthose recommendations.

On 17 May 1999, the US requested the Dispute Settlement Body of the WTO toallow the suspension of tariff concessions to the EC and its Member States and on 12July 1999, the WTO Arbitrator determined that the level of impairment suffered bythe US was $116.8 million.

In reaction to this, the US suspended the application of tariff concessions byimposing a 100% ad valorem rate of duty on a list of mainly agricultural productsfrom 29 July 1999 onward.

The same “carousel” legislation applies to this list and as such the US is expected toannounce a revised version in the near future.

Ceramics and Glass

At the end of the Uruguay Round, customs duties on ceramics and glass products remainrelatively important and higher in the US than in Europe. During the Uruguay Round theUS rejected the Community’s offer to abolish tariffs in this sector, even though Mexico,one of Europe’s leading competitors in the US market, should, after a transitional period,enjoy a zero rate by virtue of the NAFTA (North American Free Trade Agreement).There are products of importance for EU trade which will continue to be confronted byhigh tariffs even when the Uruguay Round reductions have been fully implemented.These include hotel and restaurant ware, on which the duty rates currently are 30% ifmade of porcelain or china and 31.5% for others, and certain drinking glasses and otherglassware on which the duty rates currently are 33.2% and 38% respectively.

Textiles and LeatherThe average trade weighted reduction made by the US in the Uruguay Round wasonly 12% for textiles and clothing and 5.2% for footwear. (For textiles and clothingthe reductions which were made will be implemented over ten years). This meansthat many significant tariffs and tariff peaks will remain on products of exportinterest to the EU even when the Uruguay Round reductions have been fullyimplemented. These include certain woollen fabrics and articles of apparel for whichthe current duty rates are 31.5% plus a specific rate and 33.3% respectively.

Jewellery

The US jewellery sector is protected by an average tariff of 6% with the highest postUruguay Round tariff being 13.5%. The corresponding EU rates stand between2.5% and 3%. Furthermore, the US maintains very significant import duties oncertain semi-finished products made of precious metals. Because of the very highincidence of raw material cost in this sector even modest tariff barriers significantlyreduce the access of European jewellery products to the US market.


16

3.2 Tariff Quotas

Agriculture and Fisheries

The import of certain agricultural products into the US takes place mainly underWTO bound tariff quotas. The EU is monitoring closely the management of suchquotas by the US Administration.

The EU remains concerned about certain in-built rigidities in the licensing importsystem for dairy products. This is in part based on historical trading and results inlicences being awarded to companies who no longer trade in milk products. Thedivision of EU quotas for certain cheeses into Tokyo Round quantities and UruguayRound quantities should be eliminated. This amalgamation is particularly needed forSwiss or Emmenthaler type cheeses and for the NSPF (not specifically provided for)group, for example. One EU quota for each cheese group would make these quotasmore transparent, comprehensible and accessible.

As regards the management of tariff quotas for tobacco, the EU is concerned that themethods applied seem more restrictive than necessary and have the potential to createobstacles to EU exports.


17

4. NON-TARIFF BARRIERS

4.1 Registration, Documentation, Customs Procedures

Excessive invoicerequirements

Invoice requirements for exporting certain products to the US can be excessive. Theinformation requirements far exceed normal customs declaration and tariffprocedures. They are unnecessary because US Customs are entitled to ask for allnecessary supplementary documents and information during clearance (as providedfor by the Kyoto Convention). There should be no systematic demand for this kindof information. These formalities are also burdensome and costly, thus constituting abarrier against new entrants and small companies. As a result, large establishedsuppliers are privileged and small and new competitors disadvantaged. These effectsare particularly disruptive in diversified high-value and small-quantity markets thatare of special relevance for the EU.

US Customs does not recognise the EC as a country of origin and refuses to acceptEC certificates of origin. This means that in order to justify EC country of originstatus, EU firms are required to furnish supplementary documentation and followfurther procedures, which can be a source of additional costs.

Textiles and Leather

Customs formalitiesCustoms formalities for imports of textiles, clothing and footwear to the US requirethe provision of particularly detailed and voluminous information. Much of thisinformation would appear to be irrelevant for customs or statistical purposes. Forexample, for garments with an outer shell of more than one construction or material,it is necessary to give the relative weight, percentage values and surface area of eachcomponent; for outer shell components which are blends of different materials, it isalso necessary to include the relative weights of each component material.

Origin rulesOn 1 July 1996, the US introduced a wholesale revision of its origin rules for textilesand clothing products. While for many textile and clothing products these US originrules paralleled those of the EU, printing and dyeing of fabric no longer conferredorigin as it did under the former US rules.

A Trade Barriers Regulation procedure was initiated on 22 November 1996 furtherto a complaint lodged by the Italian textile industry and led to the adoption of aCommission decision to request WTO consultations. The investigation carried outby the Commission services demonstrated that the US legislation was notably inbreach of the WTO Agreement on Textiles and Clothing and the WTO Agreement onRules of Origin.

After receiving a request for WTO consultations from the EU, the Administrationeventually agreed in July 1997 to the modification of the contested rules, at the latestat the end of 1998. The US agreed to modify its rules of origin either by adopting thesolution resulting from the international harmonisation process or, if suchnegotiations failed to reach an agreement by the July 1998 deadline, by reverting toits previous rules of origin. The US also agreed to a number of transitional measuresaiming at ensuring that, in the meantime, the EU products’ access to the US marketwould not be disturbed or diminished.


18

The case has been resolved finally by section 405 of the Trade and Development Actof 2000, enacted on 18 May 2000 plus silk labelling legislation (PL106-36) enactedin June 1999.


The US has introduced a compulsory system of certificates of origin for yellowfintuna caught in the Eastern Tropical Pacific since July 1992. Certification rules arealso applied for countries using large-scale trawl nets.

The US Code, Title 46, Shipping, Section 12108, blocks the potentially interestingpossibility for EU fishermen to fish in US waters under a US flag since foreign-builtUS flag vessels cannot be documented with a fishery endorsement, thereby alsopreventing the possibility of joint ventures and joint enterprises. The AmericanFisheries Act of 1998 included a provision that amends the percentage of shares in avessel that must be held by US citizens in order for the vessel to be considered a USvessel. The necessary percentage of ownership shares was increased from 50% to75%.

4.2 Levies and Charges (Other than Import Duties)

User feesThe need to tackle the budget deficit without increasing taxes has led to theestablishment of a series of user fees by which the user of a particular (formerly free)service pays an amount presumed to cover the cost of the service provided.

As a result of laws enacted in 1985 and 1986, the US imposes user fees on thearrival of merchandise, vessels, trucks, trains, private boats and planes, as well aspassengers. The Customs and Trade Act of 1990 and the Omnibus BudgetReconciliation Act of1990 extended and modified these provisions by, among otherthings, considerably increasing the level of the fees. Excessive fees levied forcustoms, harbour and other arrival facilities, that is for facilities mainly used byimporters, place foreign products at an unfair disadvantage vis-à-vis US competition.

The most significant of the customs user fees is the Merchandise Processing Fee(MPF). The MPF is levied on all imported merchandise except for products from theleast developed countries, from eligible countries under the Caribbean BasinRecovery Act and the Andean Trade Preference Act, and from US offshorepossessions. It is also levied on merchandise entered under Schedule 8, SpecialClassifications, of the Tariff Schedules of the US. Fixed previously at 0.17% of thevalue of the imported goods, the MPF rose to 0.19% in1992 and amounts to 0.21%ad valorem on formal entries with a maximum of US$ 485 as from 1 January 1995.Whilst the MPF was to last until 30 September 1990 when established, it is now setto run until 30 September 2003.

At the request of Canada and the EU, the GATT Council instituted a Panel inNovember 1987 that stated that the US Customs user fees for merchandiseprocessing were not in conformity with the General Agreement. The Panel ruled thatcustoms user fees should reflect the approximate cost of customs processing for theindividual entry in question. This principle was not met by an ad valorem systemsuch as that used by the US. The GATT Council adopted the Panel report inFebruary 1988.

The present customs user fee structure is somewhat more equitable, since the fixing


19

of a ceiling makes it less onerous for high-value consignments. However, the fee isstill likely, in many cases, to exceed the cost of the service rendered since,irrespective of the level, it is still based on the value of the imported goods.

HarbourMaintenance Tax andHarbour ServicesFee

US Customs also participates in the collection of the Harbour Maintenance Tax(HMT). The HMT is levied in all US ports on waterborne imports, at an ad valoremrate of 0.125%. Collected monies are transferred to the Harbour Maintenance TrustFund to provide for the operation and maintenance of channels and harbours.However, the ad valorem basis for the HMT collection makes it difficult to justify asa fee approximating the cost of the service provided.

Moreover, there is a significant accumulation of unused funds, which reachedUS$ 1.4 billion in fiscal year1998 and is projected to rise to US$ 2.2 billion byfiscal year 2000. This points to the excessive nature of the HMT.

The US Court of International Trade in October 1995 ruled that under US law theHMT is a tax and not a user fee. Taxes on exports are prohibited by the USConstitution. The US Court of Appeals confirmed this ruling in June 1997 as did theUS Supreme Court in March 1998. As a result, the US authorities have stoppedcollecting HMT on exports. However, the HMT is still being collected on imports.In March 1998, the EU requested WTO dispute settlement consultations to challengethe imposition of HMT on imports. Two rounds of consultations were held inGeneva on 25 March and 10 June 1998. On 30 April 1999, the Administrationintroduced a bill to replace the HMT with a new Harbour Services Fee (HSF), H.R.1947. This new fee would not only finance port operation and maintenance, as theHMT did, but also new port construction, for a total amount of US$1 billion peryear. The full costs of those activities, which benefit the entire US economy, wouldhave to be borne by a small group of economic operators, namely shipping lines. Inlegal terms, the proposed legislation would duplicate many of the WTO problemsinherent in the HMT. Most importantly, the so-called “fee” would still be a taxrather than a true user fee, since the charges would not be directly andproportionately related to any true service provided in each individual instance to avessel and the goods it carries. This is clear, for instance, from the fact that:

- fixed rates are charged for all port visits in the US, whether or not the port inquestion needs port maintenance or new port construction;

- container ships are significantly overcharged compared to, for instance bulk ships,noting that imports use a proportionately higher share of container ships than USdomestic shipments and exports;

- many exemptions exist for different kinds of US vessels and for shipments betweenthe US mainland and Alaska, Hawaii and US possessions.

The EU therefore does not support adoption by Congress of the bill as proposed bythe Administration, and is closely monitoring the current inter-agency review of thefinancing of US harbour maintenance.

Automotive

The US levies the following three taxes/charges on the sales of cars in the US thatraise concern to European automakers: the Luxury Tax, the Corporate Average FuelEconomy (CAFE) payment and the so-called Gas Guzzler Tax.

The Luxury Tax is an excise tax imposed since 1990 on cars valued above anarbitrary threshold, currently around US$ 36,000. The tax has a higher incidence on


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imported cars than on US produced cars. Originally it also applied to leisure boatsand jewellery but these items were later exempted due to pressure from USproducers. The luxury tax is scheduled to be eliminated in 2003, with the tax leviedfalling from 5% in2000, to 4% in 2001, and 3% in 2002.

The CAFE payment is a civil penalty payment levied on a manufacturer or importerwhose range of models has an average fuel efficiency below a certain level, currently27.5 miles per gallon (mpg). CAFE favours large integrated automakers orproducers of small cars rather than those who concentrate on the top end of the carmarket, such as importers of European cars.

The so-called Gas Guzzler Tax is an excise tax of US$ 1,000 - 7,700 per car, leviedon all cars not meeting fuel economy standards set by the US EnvironmentalProtection Agency (EPA), currently 22.5 mpg. This fuel economy cut-off point isnot founded on any reasonable or objective criterion and leads to discriminationagainst imported cars.

European automakers, with a total market share in the US of only 4%, bear nearly 70% ofthe revenue generated by the luxury tax, 85% of that by the Gas Guzzler tax and almost100% of the CAFE penalties.

Shipbuilding

The US applies a 50% ad valorem tax on non-emergency repairs of US owned shipsoutside the US and on imported equipment for boats, including fishnets on the basisof Section 466 of the Tariff Act of 1930, as amended in 1971 and 1990. Under thelatter amendment the tax would not apply, under certain conditions, to foreign repairsof “LASH” (Lighter Aboard Ship) barges and spare vessel repair parts or materials.The implementing legislation of the OECD Shipbuilding Agreement should makeappropriate provision for abolition of this tax as applicable to the contracting partiesof the Shipbuilding Agreement (not yet entered into force).

4.3 Import Prohibitions

The right of sovereign nations to take measures to protect their essential nationalsecurity interests has been widely recognised by multilateral and bilateral tradeagreements. However, it is in the interest of all trade partners that such measures areprudently and sparingly applied. Restrictions to trade and investment cannot bejustified on national security grounds if they are, in reality, essentially protectionist innature and serve other purposes than the protection of security interests.

National securitybased restrictions

Under Section 232 of the Trade Expansion Act of 1962, US industry can petition forthe restriction of imports from third countries on the grounds of national security.Protective measures can be used for an unlimited period of time. The Department ofCommerce (DoC) investigates the effects of imports that threaten to impair nationalsecurity either by quantity or by circumstances. Section 232 is supposed tosafeguard US national security, not the economic welfare of any company, exceptwhen that company’s future may affect US national security. The application ofSection 232 is not dependent on proof of injury to US industry.

In the past, the EU has voiced its concern that Section 232 gives US manufacturersan opportunity to seek protection on grounds of national security, when in reality theaim is simply to curb foreign competition. The EU will continue to monitor closely


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the impact of these restrictions.


Tuna-DolphinThe Marine Mammal Protection Act of 1972 (MMPA) aims at protecting marinemammals, particularly dolphins, by progressively reducing the acceptable level ofdolphin mortality in US tuna-fishing operations in the Eastern Tropical Pacific (ETP)Ocean and providing for sanctions to be taken against other countries which fail toapply similar standards for dolphin protection. “Primary” embargoes are currentlybeing applied to imports of certain yellowfin tuna products from Mexico, Panama,Colombia, Vanuatu and Venezuela. “Secondary” embargoes on yellowfin tunaproducts are imposed on imports from “intermediary nations” – namely, countrieswhich are exporting to the US and have failed to certify that they have not importedfrom the primary embargoed countries during the preceding six months. Costa Rica,Japan and Italy are currently subject to such a secondary embargo.

Mexico, as a primary-embargoed country, requested a GATT Panel in November1990. The Panel concluded that the US primary and secondary embargoes were notin conformity with GATT Article XI (Elimination of Quantitative Restrictions) butthe Panel’s report was never adopted. Subsequently the EU requested theestablishment of a further GATT Panel in February 1993 which found against theUS’ unilateral measures imposed for environmental reasons and it reiterated thattrade measures cannot be imposed with a view to forcing other countries to changetheir environmental and conservation policies within their own jurisdiction. Again,this Panel’s report was not adopted.

In the framework of IATTC (Inter-American Tropical Tuna Commission) themembers (including the US, the Central American and Latin American countries)have negotiated and agreed upon an Agreement on the International DolphinConservation Program (IDCP) and adopted it in February 1998. The Agreement wasopened for signature from 21 May 1998. The entry into force of this Agreement willallow the US to lift its import embargo. The international agreement on the IDCPbecame effective on February 15, 1999, when the fourth country ratified. The US,Panama, Ecuador, and Mexico are the countries that have ratified to date. On March3, 1999, the US Secretary of State provided the required certification to Congressthat the international agreement on the IDCP was in force. Key provisions of the USIDCP Act became effective on this date. The US will allow imports of tunaharvested under the IDCP to carry a dolphin-safe tuna label only if no dolphin werekilled or seriously injured during a set in which tuna were caught.

Previously, tuna products containing tuna harvested in the ETP could be labelled"dolphin-safe" only if no intentional setting on dolphins occurred during the fishingtrip. When the new definition goes into affect in the Fall, tuna may be labelled"dolphin-safe" only if no dolphins were killed or seriously injured during the set inwhich the tuna were caught. The EU is presently not a member of IATTC, but theCouncil has authorised the Commission (by a decision of 22 April 1999) to negotiatewith the ICCAT (International Commission for the Conservation of Atlantic Tunas)members the necessary amendments to the Convention as to permit the EU accession.The Community intends to sign the IDCP at the earliest possible time and will in themeantime apply the Agreement provisionally.


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Drift net fishingFurthermore, amendments to the Magnuson-Stevens Fishery Conservation andManagement Act of 1983 (MFCMA) require the DoC to list nations whose nationalsengage in large-scale drift net fishing in a manner unacceptable to the US authorities.Such a nation may be certified for the purposes of the so-called “Pelly Amendment”and its marine products may be consequently embargoed.

The Commerce Department identified on March 19, 1999 an EU Member State(Italy) as a nation whose fishing vessels may be conducting high sea, large-scaledriftnet fishing in violation of the High Seas Driftnet Fisheries Enforcement Act.

The DoC action carried out the order of the US Court of International Trade in New Yorkto identify Italy as a nation for which there is reason to believe its fishermen or vessels areviolating the ban on large-scale driftnets used in commercial fishing operations.According to the Act, the two nations have 30 days to commence consultations and 90days to conclude them before Italy may become vulnerable to trade restrictions.

ShrimpPursuant to section 609 of Public Law 101-162 exports of shrimp to the US will beembargoed unless nations can provide evidence that their shrimp trawlers match USefforts to protect sea turtles (artisanal fishing, having a sea turtle excluder programor fishing for cold-water shrimp only). The US authorities have now certified forty-two nations, but five Member States (France, Spain, Portugal, Italy and Greece) havenot been certified. Portugal presented a démarche to the Department of State in May1996 underlining, inter alia, its concerns regarding the potential extraterritorial effectof this legislation. Following WTO consultations in December 1996, Thailand,Malaysia, Pakistan and India requested the establishment of a Panel (January-February 1997). The EU participated as a third party.

The Panel report of 15 May 1998 concluded that the US import ban on shrimps andshrimp products is not consistent with Article XI:1 of GATT 1994, and cannot bejustified under Article XX of GATT 1994. The report was very critical on theunilateral measures carried out by the US as well as the lack of commitment to reacha negotiated, multilateral solution. In July 1998, the US filed an appeal of the Panelfindings.

Although the Appellate Body of the WTO to some degree reversed the findings of thePanel by agreeing that the US measure served an environmental objective recognisedas legitimate under GATT Art. XX(g), the measure had been applied by the US in amanner that constitutes an arbitrary and unjustifiable discrimination betweenmembers of the WTO where the same conditions prevail.

The Appellate Body further stressed that the US should have consulted andnegotiated with the other countries involved and tried to reach a multilateralagreement on turtle protection. Finally, the Appellate Body concluded that the USauthorities should bring its measure into conformity with the obligations of the USunder the GATT Agreement.

Dairy productsThe import of dairy products made from unpasteurised milk such as soft cheese, forwhich there is a ready market in the US is generally prohibited, even though anumber of US States permit the production and marketing of such products. Theimport of fresh dairy products, such as yoghurts, is effectively prohibited through theapplication of the Import Milk Act.

The import of milk protein into the US is generally permitted. The EU has asubstantial export to the US of milk protein used by especially the meat and breadindustries in their processing. The most obvious customer, the yoghurt industry is,


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however, not allowed to use imported proteins, unless they originate in industries,that are Grade A approved by the US authorities. No EU dairy is Grade A approved,and it seems impossible to become Grade A approved. Numerous meetings with theFDA have not solved the problem.

4.4 Import Quotas

Fisheries

Allocations toforeign fishing fleets

Each year, the US fixes the total allowable level of foreign fishing (TALFF) andaccordingly makes allocations to foreign fishing fleets. Squid fishing opportunitiesfor EU vessels off the east coast of the US have been gradually phased out under theterms of both the Magnuson-Stevens Fishery Conservation and Management Act(MFCMA) and the former Governing International Fisheries Agreement (GIFA) infavour of the development of the US domestic fishing industry. Though mackerelmigrating off the east coast is the only stock currently identified as being in surplusin the US Exclusive Economic Zone, the US authorities have set a zero TALFF since1990 for this stock, following pressure from the domestic industry to protect itsmarkets. The EU believes that this line neither corresponds to the provisions andintentions of the MFCMA or to the provisions of Article 62 of the UN Convention onthe Law of the Sea.


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4.5 Standards and Other Technical Requirements

Complex regulatorysystem

In the US, products are increasingly being required to conform to multiple technicalregulations regarding consumer protection (including health and safety) andenvironmental protection. Even if, in general, not intentionally discriminatory, thecomplexity of US regulatory systems can represent an important structuralimpediment to market access. For example, it is not uncommon that equipment foruse in the workplace is subject to US Labor Department certification, a countyauthority’s electrical equipment standards, specific regulations imposed by largemunicipalities, and other product safety requirements as determined by insurancecompanies.

This situation is aggravated by the lack of a clear distinction between essential safetyregulations and optional requirements for quality, which is due in part to the role ofsome private organisations as providers of assessment and certification in both areas.Moreover, for products where public standards do not exist, product safetyrequirements can change overnight as the product liability insurance market makes anew assessment of what will be required for insurance purposes.

The WTO Agreement on Technical Barriers to Trade (TBT) covers the rules forstandards, technical regulations and conformity assessment procedures. The TBTAgreement is applicable to all WTO Members, and provides,inter alia, that itsMembers must use international standards as the basis for their technical regulations,standards and conformity assessment procedures. However, it provides for certainexceptions for specific, legitimate objectives, such as protection of human health andsafety, plant and animal health, and protection of the environment, where theinternational standards are inadequate for the purpose. The TBT Agreement isintended to ensure that technical regulations and conformity assessment proceduresare not more trade restrictive than required for the legitimate purpose of theregulations concerned and the risks they are designed to cover.

The EU believes that the TBT Agreement provides an excellent base on which totackle technical barriers to trade at the multilateral level. It specifies stricterdisciplines in many of the areas of concern discussed below, such as the use ofinternational standards, labelling requirements and sub-federal standards. TheAgreement also provides for further bilateral follow-up actions. In this context, theEU and US recently concluded a Mutual Recognition Agreement and are workingtowards regulatory co-operation to augment the impact of the existing sectoraldialogues.

Non-use ofinternationalstandards

However, a particular problem in the US is the relatively low level of use, or evenawareness, of standards set by international standardising bodies. All parties to theTBT Agreement are committed to the wider use of these standards; but although asignificant number of US standards are claimed to be “technically equivalent” tointernational ones, and some are indeed widely used internationally, very fewinternational standards are directly adopted. Some US standards are in directcontradiction to them. The EU has attempted to clarify some of these issues indiscussions in the TBT Committee in Geneva, and in particular, to establish theposition of international standards bodies in the context of the Agreement, but atpresent agreement with the US has been difficult to reach. Discussions in the WTOon conformity assessment issues are progressing but are at an early stage.


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Illustrative cases:

Fastener Quality ActThe 1990 Fastener Quality Act (FQA) aims to deter the introduction of sub-standardindustrial fasteners into the US. Amendments to the FQA and its implementingregulations have introduced burdensome and costly accreditation and certificationprocedures as well as discriminatory record-keeping and documentationrequirements. Industry on both sides of the Atlantic expressed serious concern withthe FQA and its proposed implementation by the Department of Commerce. TheFQA was discussed on several occasions between the EU and US and negotiations onmutual recognition of conformity assessment procedures with respect to fastenerstook place, although a final agreement was never reached. Industry concerns, EU-US discussions, and the recognition that major improvements in manufacturing andquality control systems since the adoption of the original Act led to the enactment on8 June 1999 of the Fasteners Quality Amendments Act of 1999 (PL 106-34). Thenew legislation exempts most fasteners from the FQA. Subject to furtherverification, the revised FQA should address most of the problems that industrywould otherwise have encountered.

Nutrition labellingThe Nutrition Labelling and Education Act1990 requires certain products to belabelled regarding their content. The EU is concerned that the rules differ frominternational standards on labelling established by the Codex Alimentarius (uponwhich the corresponding EU legislation is based) and, furthermore, that thislegislative action would have serious negative consequences on EU-US trade infoodstuffs and result in significant commercial obstacles to EU food productsmarketed in the US and vice-versa.

Excessive relianceon mandatorycertification

Against the background of an international trend towards deregulation or theminimising of third party intervention in the regulatory process, one problemexperienced in the US is the continued reliance on third party conformity assessmentprocedures for many industrial products.

In several sectors, such as that of electrical equipment and domestic appliances,technological development and consumer awareness have permittedpublic regulatorsaround the world to reduce the extent of pre-marketing third party testing andcertification in favour of self-certification by manufacturers backed up by post-market surveillance and control. In the US however, third party certification in thesesectors is still mandatory (de jure and/or de facto), and as such may posedisproportionately high costs on suppliers to the US market.

As far as IT products are concerned, since they are subject to continuous testing andassessment in their development and production process, it should be unnecessary torepeat such tests by a third party. Industry stresses the advantages of an appropriate“supplier declaration of conformity”. US regulatory agencies have begun a review ofthis approach, and are moving in certain instances towards manufacturer’sdeclarations of conformity (PCs, VCRs, for example).

Regulatorydifferences at Statelevel

There are more than 2700 State and municipal authorities in the US which requireparticular safety certifications for products sold or installed within their jurisdictions.These requirements are not always uniform or consistent with each other, or eventransparent. In particular, individual States sometimes set environmental standardsgoing far beyond what is provided for at Federal level. Agricultural and foodimports are also often confronted with additional state-level requirements, which may


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lead to obstacles to trade.

Acquiring the necessary information and satisfying the necessary procedures is amajor undertaking for a foreign enterprise, especially a small or medium sized one,as at present there is no central source of information on standards and conformityassessment. One company has estimated the volume of lost sales in the US due tothe multiplicity of standards and certification problems to be about 15% of their totalsales. The expense of certification alone was put at 5% of total sales, as was theamount spent on product liability insurance (a far less significant factor in Europe).

The hidden costs could be much greater because the time and cost involved can begreatly reduced simply by using US components that have already been individuallytested and certified. This is particularly the case for electrical products.

In addition, the private organisations providing quality assurance may impose the useof certain specific product components under their own programmes that are not inconformity with international quality assurance standards (such as the InternationalOrganization for Standardization (ISO) 9000 series). In some cases (e.g. that oftelecommunications network equipment) an expensive evaluation procedure isrequired which does not lead to certification and does not take account of anyadditional requirements by individual buyers.

For electrical appliances Underwriter’s Laboratories (UL) have complete discretionon the standards concerning safety certification and, on occasion, can makeseemingly arbitrary changes to them. UL lists the products that comply with theapplicable standards, but they do not approve them. This is done by a variety ofcompeting testing and certification agencies, some of them offering testing facilitiesin Europe.

For example, in early 1993 UL revised standard 1028 on hair clipping and shavingappliances, amending the specifications for the on/off switch. The new ULrequirement adds nothing to the safety of these appliances, but adds considerablecosts to European manufacturers. It has also required the subsequent modification ofthe related International Electrotechnical Commission standards (endorsed by theComité Européen de Normalisation Electrotechnique (CENELEC) [EuropeanElectrotechnical Standards Committee]).

Labellingrequirements

Providing consumers with accurate, useful information is certainly in everyone’s bestinterest. However, sometimes the information required to be put on a label seems tobe specifically designed to influence consumer behaviour. For other products,labelling requirements seem to be another way of slowing down the process of gettinga new product to the market. As in the case of origin certificates, labelling andmarking requirements do not recognise the use of the notion "Made in EC".

Automotive

The American Automobile Labelling Act provides that passenger cars and othervehicles must be labelled with, inter alia, the proportion of US- and Canadian-madeparts and the final point of assembly. These requirements appear to be intended toinfluence consumers to buy cars of US-Canadian origin. There is also an obligationto indicate the origin of engines and gearboxes that could discourage USmanufacturers from importing parts from Europe. Moreover conforming to thelabelling requirement may involve the disclosure of confidential data from non-USmanufacturers.


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Pharmaceuticals

Approval proceduresfor drugs and drugingredients

In the US, as in Europe, a competent authority (the Food and Drug Administration(FDA) in the US) must approve a new medicinal product before it can becommercialised. However, the delays for non-US new medicinal products appear tobe longer than for US developed medicinal products. This may be in part due to theInvestigational New Drug (IND) system that allows the FDA advanced knowledge ofmedicinal products tested in clinical trials in the US.

By means of an “over-the-counter” (OTC) procedure, approved active substances fora medicinal product are put on a list (OTC-Monograph) by the FDA, so thatdifferent final products derived from these active substances can be marketed withoutany application or delay. However, the OTC drug approval procedure requires thatthe active substance has a US market history. This restricts market access for OTCproducts with lengthy marketing experience in countries with equally sophisticateddrug regulatory systems and particularly hampers access for plant-based (herbal)medicinal products with a long tradition in Europe. The OTC monograph waspublished on 17 March 1999 but does not yet allow for the acceptance of foreignclinical data for ingredients commonly used in Europe but not in the US.

In addition, the problem of admission of European suntan lotions to the US marketwas first raised with the FDA in 1991. The FDA also received a petition byEuropean cosmetic firms to open the simplified drug approval procedure to UV-filters that had already been accepted in the EU. The FDA did approve sunscreenproducts containing avobenzone in concentrations of up to 3%; however, the finalmonograph covering this and other sunscreen products waspublished on 21 May1999. Should the FDA follow the monograph’s conclusions, all of thecharacteristics of the label on a sunscreen product such as the size of the type, thesize of the lines, the words used, and that the label would have to use black typeagainst a light background, which can impair a brand’s identity.

A multilateral framework for cooperation on cosmetics has been established betweenthe EU, US, Canada, and Japan. A work programme on regulatory cooperation hasbeen established with a view to align review and approval procedures and examineequivalence of technical requirements.

Textiles and Leather

Markingrequirements

Extensive product description requirements complicate exports to the US. Particularrules for marking and labelling of retail packages to clarify the country of origin,indicate the ultimate purchaser in the US and state the name of the country in whichthe article was manufactured or produced are burdensome. Articles that areotherwise specifically exempted from individual marking are an exception to thisrule. All textile fibres imported to the US have to be marked with the generic namesand percentages by weight of the constituent fibres present in the textile fibre productin amounts of more than 5%. Any wool products containing woollen fibre, with theexception of carpets, rugs, mats, upholsteries and articles made more than 20 yearsprior to importation, have to be clearly marked so as to satisfy the requirements ofthe Wool Products Labelling Act of1939 (with regard to information on weight andimporter). The Fur Products Labelling Act imposes similar obligations on furproducts.


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Wine labellingWith respect to wine labelling, there exist procedures, both at Federal and State level,for the approval of labels on the front and rear of wine bottles. In general, a certaintime period is required to obtain label approval at Federal level and, at State level,the approval period varies according to the State. This renders the approvalprocedure time-consuming, confusing to exporters (who have to comply withdifferent State regimes) and costly. In addition, European exporters aregeographically disadvantaged in the sense that they have to send the original labelto the competent US authorities while the US producers can do that with thedifferent offices located in the main producer regions.

Sanitary andphytosanitary issuesdelays at customscontrols

Differences in US and EU sanitary and phytosanitary requirements can haverestrictive effects on trade. For new non-manufactured agricultural products, thereare requirements for import permits to the US. The procedures between applicationand the inclusion in the list of approved products are excessively long, up to severalyears. This has been experienced also in cases where other products from the samearea of production with the same phytosanitary risks were permitted. A variety ofEU exports to the US have encountered problems due to delays in US Customssampling and inspection procedures, resulting in damage to the goods and subsequentcommercial losses for the exporters. The EU does not dispute the right of the USauthorities to inspect imported goods but considers that adequate steps should betaken to deal expeditiously with perishable goods.

Canned peachesIn particular, the FDA’s time-consuming controls on the detection of pit fragments inimports of canned peaches from the EU led to detention and subsequent destructionor obligatory re-export of this product, hampering the flow of trade and negativelyaffecting the volume of exports.

Apples and pearsRegulations governing the entry of apples and pears from certain Member States(Code of Federal Regulations of 1996, Title 7, Subtitle B, Ch. III, §319-56-2r)provide for a pre-clearance inspection programme, with the aim of guaranteeing,prior to shipment, that consignments are free from certain specified insect pests suchas the pear leaf blister moth, and from “other insect pests that do not exist in the USor that are not widespread in the US.”

Operating in this way on the basis of an open list of unspecified pests is not ascientific approach and is contrary to the spirit of transparency as provided for in theInternational Plant Protection Convention and to the requirement of pest risk analysisand transparency laid down in the WTO Agreement on the Application of Sanitaryand Phytosanitary Measures. The stringent inspections and the increased costsarising from the pre-clearance inspection programme have clearly had a negativeeffect on EU exports of apples and pears to the US. Consultations with the aim ofimplementing the “inspection at port of arrival” option resumed in 1996. A draftprotocol for a “Schedule of Conditions” concerning participation in an “experiment”for the export of apples and pears from the EU to the US without phytosanitary pre-clearance by the US in the Member State of production, has been submitted to theUS. However, the consultations have not yet been conclusive.

Pathogen freeregions

Under US Regulations (Code of Federal Regulations of 1996, Title 7, Subtitle B, Ch.III, §319-56-2) the import of fruit and vegetables from an EU Member State, inwhich the relevant pathogen is known to occur, is not only prohibited from theinfested area of that Member State, but also from the pathogen-free areas thereof.This creates undue obstacles to exports from pathogen-free regions within the EU.


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An example is the prohibition of imports of tomatoes from Brittany because of thepresence of the Mediterranean Fruit Fly in the Mediterranean regions of France.Although Brittany is ecologically isolated from the infested regions of France, andthe French authorities carry out the necessary surveillance to avoid dissemination ofthe pest, imports into the US of ripe tomatoes from Brittany are not allowed by theUS authorities. The EU considers these measures to be excessive; they discriminateBrittany against other pathogen-free areas in the Community, which is not justifiableon phytosanitary grounds, having regard to the conditions of the internal marketwithin the Community. In July 1998 USDA announced that imports of tomatoesfrom a number of countries, including France, would be allowed. Specific conditionswere attached to the import of pink and red tomatoes from France to take account ofthe risks associated with the Mediterranean fruit fly.

Another undue obstacle is the restriction, in the case of approved citrusconsignments, of the ports of landing to those on the North Atlantic shores. Thisrequirement leads to unnecessary costs of land transport into the southern andwestern parts of the USA. If the products were pre-cleared in the Member State ofproduction, and moreover subject to cold-treatment during transport, there is nophytosanitary justification for the port restriction.

Potted plantsThe provisions on standards and certification of plants established in growing media(Code of Federal Regulations of 1996, Title 7, Subtitle B, Ch. III, §319-37-8) wererevised and effective on 13 January 1995 to permit the import into the US of fourplant genera in sterile growing media. This has reduced the obstacles encountered byEU exports of potted plants to the US.

The new rule contains some requirements that are difficult for exporters to fulfil. Forexample, it is impossible to satisfy certain obligations because some of the species orgenera involved have a growth cycle that is shorter than the waiting period requiredby USDA before export can take place.

It is noted that APHIS (Animal and Plant Health Inspection Services) has recently re-opened and extended the comment period on a proposal to allow the importation ofRhododendron (Azalea) established in growing media from Europe, originallypublished in the Federal Register of 7 September 1993. This was the result of thecompletion of consultations on Rhododendron in conformity with section 7 of theEndangered Species Act, which revealed that import from Europe is not likely toadversely affect endangered or threatened species or their habitants. In April 1998USDA published a proposal to allow the importation of Rhododendron in establishedgrowing media.

Almost all sorts of plants are permitted imported, and almost all sorts of growingmedia (except soil) are permitted imported. However, when the permitted plants arein permitted growth media the import is not permitted, unless a special Pest RiskAssessment has been performed by APIS/USDA. Twenty years ago EU producersasked APHIS to make the PRA for 60 sorts. So far they have made 5 assessments,in all cases resulting in approval. This extremely long delay is not acceptable.APHIS agrees, but regrets not to have the staff to speed it up. The same office hasthousands of applications for approval from all over the world for flowers and fruitsand vegetables for import and export. Export approvals have priority.

The sixth assessment of plants from the EU list for Schlumbergera (X-mas cactus)has just been approved by APHIS. However, since cacti are considered endangeredspecies, the Fish and Wildlife Service must give final approval, although


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Schlumbergera is among the approved sorts of plants and already imported in bigquantities from the EU as seedlings not in a growing media. It may take years to getthe final approval, if ever from the Fish and Wildlife Service."

Hardy nursery stocksThe mandatory requirement for a two-year post-entry quarantine on an importer’spremises for hardy nursery stock is considered by the EU to be excessive. Its mainpurpose is believed to be the detection of latent infections by organisms of quarantineconcern. Although this measure may be justifiable in the case of new or developingtrade in specific commodities, the EU considers this not to be the case, if the measureis required for long-term trade on a permanent basis. This requirement should beexamined in consultations with the US.

BSEThe US introduced rules in 1997 on the import of ruminant animals and productsthereof from all European countries based on concerns about Bovine SpongiformEncephalopathy (BSE).

The US requirements are not scientifically based, do not follow the OIE Code, anddiscriminate in targeting European countries. The US does not make any distinctionbetween countries where the incidence of BSE is high or low (the latter beingcountries with occasional cases). The US action blocked all EU ruminant exports,pending examination by the US of data submitted. The EU has raised its concerns atthis excessive action both bilaterally and in the Committee on Sanitary andPhytosanitary Measures in Geneva.

GoatsQuite apart from the BSE restrictions, the US also imposes animal health restrictionson the import of goats on the grounds of the risk of scrapie in sheep. Theserestrictions are not justified because of the widespread presence of scrapie in the USsheep population.

Recognition of theCommunity

The EU has a comprehensive set of veterinary legislation completed under the SingleMarket programme, and apart from certain specific restrictions based on the relevantdisease status, there is free movement of animals within the Community.Nevertheless, the US continues to treat the Community on an individual MemberState basis for the majority of issues, thus excluding several products of manyMember States from access to the US market. The entry into force on 1 August1999 of the EU-US Veterinary Agreement should improve the situation.

RegionalisationThe EU operates a policy of regionalisation, where restrictions are applied in zonesaffected by certain animal diseases, with free movement of animals and productsoutside the affected zones. An animal or product fit for movement is then consideredfit for export. The principle of regionalisation as an effective means of controllinganimal disease has now been incorporated into the US Tariff Act 1930 by theNAFTA and is part of the WTO Agreement on the Application of Sanitary andPhytosanitary Measures. However, US import administrative rules concerning Footand Mouth Disease, Rinderpest and other relevant diseases have still not beenamended to reflect this change in legislation, despite a clear commitment in the EU-US Agreement on Application of the Third Country Meat Directive, reached in 1992.The US published a proposed rule on “Importation of Animals and Animal Products”covering only ruminants and swine on 18 April 1996. The EU made substantivecritical comments, and has continued to press for the US to recognise the EU’sapplication of regionalisation in the context of an EU-US Veterinary Agreement. Anagreement was negotiated on a technical level on 30 April 1997. The US, in a letterdated 24 February 1998, has committed itself to accept the EU’s regionalisationdecisions upon implementation of the EU-US Veterinary Agreement.


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Non-recognition ofdisease-free status

Other restrictions on live animals relate to the non-recognition by the US of the EU’sfreedom from certain diseases. The US published a proposed rule on the recognitionof the disease status of certain member States for certain diseases on 14 November1997 and confirmed it as a final rule in 1998. The US further committed itself inMarch 1998 to publish a further proposed rule covering the outstanding recognitionsof Member States and diseases, notably as regards classical swine fever. TheProposed Rule - published in the Federal Register on 25 June 1999 - together withthe additional written assurances allowed the EU-US Veterinary EquivalencyAgreement to be signed on 20 July 1999.

Non-comminglementNon-comminglement means that establishments exporting meat or meat products tothe US may not handle meat or meat products from countries that are not recognisedas being free from certain diseases of concern to the US, and that there is no mixingof meat or meat products destined for the US with meat or meat products from suchcountries. The EU-US Agreement on Application of the Third Country MeatDirective provides for an establishment to handle both categories of meat or meatproducts provided that there is a separation in time between handling them. So far,however, the US has not been willing to apply this provision of the agreement. TheEU-US Veterinary Agreement includes specific provisions for the application of non-comminglement.

Uncooked meatsImports into the US of uncooked meat products (sausage, ham and bacon) have beensubject to a long-standing prohibition. Following repeated approaches by the EU,US import regulations were modified to permit the import of Parma ham, Serranohams, Iberian hams, Iberian pork shoulders and Iberian pork loins. However, the USstill applies a prohibition on other types of uncooked meat products (e.g San Danieleham, German sausage, Ardennes ham) despite the fact that meat products may comefrom disease free regions and that the processing involved should render any risknegligible.

Egg productsThe import of egg products is allowed only under very strict conditions, inparticular, the requirement for continuous inspection of the production process.A system of periodic inspection of the production process would be acceptablefrom a human health point of view, but continuous inspection is superfluous andexpensive, and has a negative effect on prices and competitiveness.

Canned foodThe import of “Low Acid Canned Food” such as fisheries products or dairy productsis subject to a detailed prior approval system and makes no provision for acceptingsuch products produced under “equivalent” hygiene conditions.

4.6 Government Procurement

Federal Buy Americalegislation

The Buy America Act (BAA), initially inacted in 1933, is the core domesticpreference statute governing US procurement. It covers a number of discriminatorymeasures, generally termed Buy America restrictions, which apply to government-funded purchases. These take several forms: some prohibit public sector bodies frompurchasing goods and services from foreign sources; some establish local contentrequirements, while others still extend preferential price terms to domestic suppliers.Buy America restrictions therefore not only directly reduce the opportunities for EUexports, but also discourage US bidders from using European products or services.The domestic industry, through the court system and legislative lobbying, ensures


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that Buy American preferences are vigorously enforced and maintained.

The restrictions apply to government supply and construction contracts, and requireFederal agencies to procure only US mined or produced unprocessed goods, and onlymanufactured goods with at least a 50% local content. Executive Order10582 of1954, as amended, expands the scope of the Buy America Act in order to allowprocuring entities to set aside procurement for small businesses and firms in laboursurplus areas, and to reject foreign bids either for national interest or nationalsecurity reasons. As a result of the GATT (subsequently WTO) GovernmentProcurement Agreement (GPA), waivers from many Buy America provisions havebeen foreseen for GPA Parties (inter alia, through the 1979 Trade Agreements Act),including for the EU. However, the actual implementation of these waivers may insome cases produce legal uncertainty and this may act as a barrier. In addition tothat, some persistent Buy America provisions continue to limit access to the USprocurement market in a significant way.

One of the most obvious areas of Buy America is federal aid administered by theDepartment of Transportation (DOT) under several different acts, including theHighway Administration Act, the Urban Mass Transit Act, and the AirportsImprovements Act. In accordance with these acts, the DOT provides aid to the Stateand local governments for various transportation-related procurements. The State orlocal government at some level must match that money. Specifically, the Federalgovernment may fund 40% to 80% of the project (depending on the nature of thegrant), while the State or local government must fund the remaining share. Allpurchases of goods and services related to these projects must meet various BuyAmerican provisions, usually domestic content requirements of 60% and, failing that,a price penalty of up to 25%. The European Commission estimates Buy America toaffect about US$ 25 billion of contracts in FY2001, particularly mass transport andairport improvement. These are precisely the sectors where EU business is verycompetitive. This figure is expected to increase to about US$ 35 billion by2005,taking account of budget growth forecasts. These restrictions will negatively impactEuropean suppliers of products including iron and steel and transport equipment.

National securityissues

The Department of Defense (DoD) also has significant procurement expendituresthat exclude foreign suppliers of goods or services. The DoD is the largestpublicprocurement agency within the US government spending many tens of billions ofdollars annually on supplies and other requirements. Except as required by theDefense Supplement to the Federal Acquisitions Regulation (DFARS), contractingofficers must apply Buy American Act requirements to supply contracts exceedingthe US$ 2,500 micro-purchase ceiling and to service contracts that involve finishingof supplies when the supply portion exceeds the micro-purchase ceiling. In March1999, the Director of Defense Procurement reminded US defence agencies andmilitary departments to ensure that their contracting officers comply withrequirements of the BAA, as an audit report had revealed that some contracts hadbeen awarded to foreign firms in contravention of the relevant provisions.

In addition, many procurements fall under “national security” exceptions to openprocurement obligations. Although the concept of national security can be invokedunder Article XXIII of the GPA to limit national treatment in the defence sector forforeign suppliers, the use of national security considerations by the US has led inpractice to a disproportionate reduction in the scope of DoD supplies covered by theGPA. While the US denies abusing the WTO national security exemption, it hasindicated a readiness, in the context of the implementation of the GPA, to disseminatemore guidance to US procurement officials for identifying which procurements are


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covered by the Agreement and which by national security exemptions. It has alsoexpressed its intention to ensure clear and consistent identification of nationalsecurity procurements, and improve the coherence of the US Federal SupplyClassification System with the international Harmonised System. Together, theseintentions mark a first small step towards more acceptable practices.

There has been a trend towards making DoD’s other domestic preferences, apartfrom the BAA preferences, less restrictive – by expanding the preference toqualifying countries. These are countries that maintain reciprocal memoranda ofunderstanding (MoU) with the US. Currently, eleven EU Member States arequalifying countries. Still, an amendment to the fiscal year1998 DefenseAppropriations bill, which would have given the Secretary of Defense blanketauthority to waive the domestic preference for American specialty metals, stainlesssteel, flatware, clothing, or naval components, was substantially diluted by Congress.The compromise language only permits the Secretary of Defense to waive therestriction on a case by case basis under certain circumstances on a limited numberof products, rendering the application of a waiver much more difficult. In addition, abill introduced in the Senate (S. 384) in February 1999 by Commerce CommitteeChairman McCain (R-AZ) to authorise the Secretary of Defense to waive certaindomestic source or content requirements in the procurement of items procured forthe DoD failed to make any progress. In introducing his bill, Senator McCaincommented: “Mr. President, it is my sincere hope that this legislation will end onceand for all the anti-competitive, anti-free trade practices that encumber ourgovernment, the military, and US industry.”

Management and operation of research and development facilities under theDepartment of Energy, NASA, the National Science Foundation, or the DoD areoften entrusted to private companies and universities under “management andoperating (M&O) contracts.” Their M&O contracts do not follow the full and opencompetition procedures required under the Federal Acquisitions Regulations. Veryfew M&O contracts have been subject to competitive procedures and often theprocurements done by these companies themselves follow Buy Americarequirements. The US has excluded M&O contracts from its offer in the GPA.More widely, the government has instituted a number of R&D programmes in recentyears in which there is a strong preference for US participants. Examples are theRenewable Energy Export Technology Transfer Program and the High SpeedGround Transportation Development Program. Most of these programmes alsorequire Buy American compliance with respect to all materials furnished pursuant tothe project.

There are numerous other marginal expenditures. While not exhaustive, thefollowing examples of Buy America statutory programmes should be mentioned: theBalance of Payments Program; the Merchant Marine Act of 1936; the HazardousMaterials Transportation Authorization Act of 1994; the Amtrak Authorization Act;Grants for Construction of Water Treatment Works; National and CommunityService Act; National Science Foundation Act of 1988 (as amended); and thePresident’s National Space Policy Directive of 1990 and 1994. The latter precludedUS Government agencies from using foreign launch services (except, in the case ofNASA, in collaborative projects not involving an exchange of funds). This policywas subject to undefined exceptions – a possibility that was never, or almost never,used.

In October 1998, President Clinton signed the Commercial Space Act of 1998. Thislaw, on the one hand, calls on Federal agencies to buy space launch services – rather


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than launch vehicles; on the other hand, it requires these services to be procured from“US commercial providers”, subject to certain exceptions, for instance forinternational collaborative efforts related to science and technology. It thus legislatesthe Buy America policy contained until then in the President’s National Space Policybut opens the door for NASA to enter into collaborative projects with foreign spaceagencies even if they involve the disbursement of funds. It remains to be seen howthe US Administration will interpret the notion of “US commercial provider”. TheUS justified these restrictions, which initially applied to the launching of militarysatellites, on national security grounds, but is now also imposed on satellites forcivilian use. These measures are part of a set of co-ordinated actions to strengthenthe US launch industry and are clearly detrimental to European launch serviceproviders. European launch operators remain in any case effectively barred fromcompeting for most US government launch contracts, which account forapproximately 50 % of the US satellite market.

Other indirectbarriers

In addition to the direct legal barriers mentioned above, the complexity ofprocurement rules may in some cases act as a effective indirect barrier. Indeed,suppliers based in countries that are parties of the WTO/GPA are generally notdirectly excluded from the scope of Buy America and other restrictive regulations.Instead, legislation generally foresees the granting of waivers as regards thesesuppliers. However, the actual implementation of these waivers may in some casesproduce a considerable degree of legal uncertainty.

Sub-federal selectivepurchasing laws

At a sub-federal level, selective purchasing laws (whereby the access of companies tocontracts is severely or completely curtailed as a result of the companies’ businesslinks with particular third countries) continue to cause great concern. Such lawshave been adopted by the Commonwealth of Massachusetts (in the case of Burma)and more than 20 cities and local authorities, and are under consideration by anumber of other sub-federal authorities. The Massachusetts legislation has beenconsidered by the Supreme Court and found unconstitutional on the grounds ofdivision of powers between States and the federal authorities. Whilst this removesthis particular obstacle, the wider issue of principle vis-à-vis the EU, is left un-addressed.

The EU strongly objects to these attempts to regulate the behaviour of EU companiesthat are acting in full compliance with EU and Member States’ Laws.

The Commission will continue to monitor the situation in other sub-federaljurisdictions.

State Buy Americalegislation andrestrictions

Buy America or “buy local” legislation is also rife at State level. More than half ofall US States and a large number of localities do apply some “Buy Local”restrictions in one form or another. In some cases, the procurement of particularproducts are subject to such restrictions, such as steel, coal, printing and cars.Affirmative action schemes favouring small business or particular types of business(e.g. minority-owned) are also applied extensively in a large number of States.Although 39 of the 50 States are covered by the bilateral agreement of 1994 (and90% of total procurement by value at State level), there are still gaps in its scopeand, in some cases, concerns about its actual degree of implementation. Among the11 states that have not been bound in the US GPA offer, some maintain verysubstantial local preferences, which have a negative impact on EU and other foreignsuppliers. This is the case of Alaska, New Mexico, South Carolina and, to a lesserextent, Ohio and Virginia. . In the case of New Jersey, State legislation alsoprovides that for the construction of public works projects financed by State funds,


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the materials used (e.g. cement) must be of domestic origin. Even in the GPA-boundstates various exemptions (i.e;for purchases of cars, coal, printing and steel and forset aside) seriously limit the procurement opportunities open to foreigners. Besides,all procurements by States and localities that benefit from particular types of federalfunding (e.g. in mass transit and highway projects) are subject to BAA.

Set-aside for smallbusinesses

The Federal Government actively seeks to promote the growth of small businesses innumerous ways. It provides loans and grants, develops programmes to encouragebids from small business, and sets aside certain procurement contracts for smallbusiness. The “set-asides” are specifically exempted from application of the GPA.Small business set-asides represent a substantial proportion of federal procurementmoney – many tens of billions in expenditures or around 30% of all federalprocurement dollars.

The relevant legislation is the Small Business Act of 1953, as amended, whichrequires executive agencies to place a fair proportion of their purchases with smallbusinesses. This is achieved through two different types of set-aside schemes: onewhere US Federal government contracts are set-aside, regardless of the size of thecontractor, in the event that there is a reasonable expectation of bids from two ormore eligible US small or minority businesses; the other where all contracts below acertain threshold (currently US$ 2,500 to US$ 100,000) are set aside for US small orminority businesses -- contracts are only released for competitive bidding in the eventthat two or more eligible bidders cannot be identified. In this context, smallbusinesses are defined as businesses located in the US which make a significantcontribution to the domestic economy (through payment of taxes and/or use of USproducts, materials, and/or labour) and are not dominant. The standard size criteriafor eligibility as a small business for goods producing industries is 500 employees orfewer. However, for some industries (pulp, paper boxes, packaging; glasscontainers; transformers, switchgear and apparatus; relays and industrial controls;miscellaneous communications equipment; search, detection, navigation guidancesystems and instruments) the employee limit is 750 and for some others (chemicalsand allied products; tyres and inner tubes; flat glass; gypsum products; steel and steelproducts; computers, computer storage devices, terminals; motors and generators;telephone and telegraph apparatus) it is1000. For services industries, depending onthe sector, firms with total annual revenues of less than US$ 2.5 million to 17 millionare considered to be small businesses.

In 1999, the US Small Business Administration launched another programme -HUBZone - which will provide contracting benefits to small businesses located in“historically under-utilised business zones”. The first goal of the programme is tochannel at least one percent of overall federal procurement to HUBZone smallbusinesses, which at current federal spending levels equates to about $2 billion. Bythe year 2003 that goal rises to three percent, or about $6 billion.

Currently, the notion of fair proportion means that the government-wide goal forparticipation by small businesses shall be established at no less than 20% of the totalvalue of all prime contract awards for each fiscal year. Under the normal bidprocedures, there is a 12% preference for small businesses in bid evaluation forcivilian agencies (instead of the standard 6%). In the case of the DoD, the standard50% preference applies to all US businesses offering a US product.

An important number of States also operate particularly proactive small businessesand minority set-aside policies. It is estimated that in States like Texas such policieseffectively exclude foreign firms from around 20% of procurement opportunities. In


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Kentucky as much as 70% is set aside for small businesses. The active promotion ofsmall businesses is a common concern for the EU and the US. The EU is, however,concerned that the US "set-aside" measures and their exemption from the GPA arefavouring US industry and restricting the ability of foreign (EU and other) companiesdoing business in the US.

Berry AmendmentThe concept of “national security” was originally used in the 1941 DefenseAppropriation Act to restrict procurement by the DoD to US sourcing. Now knownas the “Berry Amendment”, its scope has been extended to secure protection for awide range of products only tangentially related to national security concerns -- forexample, the 1992 General Accounting Office ruling that the purchase of fuel cellsfor helicopters is subject to the Berry Amendment fabric provisions, and thewithdrawal of a contract to supply oil containment booms to the US Navy because ofthe same textile restrictions. A recent audit report by the Defense Department’sOffice of Inspector General concluded that for certain DoD procurements duringfiscal years 1996 and 1997, about half of the solicitations and contracts examinedhad not incorporated or enforced the relevant domestic sourcing requirements. Inresponse, DoD’s procurement director has taken steps to ensure that contracts at orabove the simplified acquisition threshold (presently US$ 100,000) are domesticallysourced. To comply with the Buy America provisions, contracting officers mustgenerally add 50 percent to the price of nonqualifying country end products whenevaluating offers with nonqualifying end products against offers with domestic endproducts. In September 1996 Congress adopted an amendment that extended theinitial scope of the Berry Amendment to cover also all textile fibres and yarns used inthe production of fabrics. The result of this extension is that Community fibres andyarns can no longer be used by US manufacturers for producing fabrics that they sellto the DoD.

Further DoD procurement restrictions are based on the National Security Act of1947 and the Defense Production Act of 1950, which grant authority to imposerestrictions on foreign supplies in order to preserve the domestic mobilisation baseand the overall preparedness posture of the US.

At the same time, defence procurement from foreign companies is sometimes alsoimpeded by Buy America restrictions on federally funded programmes.

MoU underminedIn practice, all NATO countries (except Iceland), all major non-NATO allies of theUS (e.g. Australia, New Zealand) as well as Sweden, Finland and Austria havesigned Memorandums of Understanding (MoUs) with the US allowing for a waiverof the corresponding restrictions. However, these MoUs are subject to US laws andregulations, and consequently, other restrictions can be imposed annually byCongress through the appropriations process. For example, US legislation allowsthe Administration (DoD and USTR) to rescind a waiver if it determines that aparticular ally discriminates against US products. In addition, Congress isunilaterally overriding the MoU by imposing ad hoc Buy America requirementsduring the annual budget process (e.g. in the case of anchor and mooring chains).There are also indications that US procurement officers disregard the exemption ofBuy America restrictions for MoU countries (e.g. in the case of fuel-cells, ball androller bearings and steel forging items).

In fact, the barriers to defence trade with the US result from a complex set of rulesand practices aiming at imposing “domestic sources restrictions” in US defenceacquisition. A partial identification of all these barriers is provided in a July 1998report of the US General Accounting Office that was established to justify these


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“domestic sources restrictions”. The following examples illustrate the large varietyof obstacles facing EU exporters to US:

- Specific requirements to produce goods on US soil. This can take many forms,for example as part of the DoD programme approval procedure, a requirementexists that any major defence item must be produced on US soil, so that EUcompanies can only do business by selling the licences to manufacture (e.g.Harrier Vertical Take-Off and Landing Jet). In relation to large calibre cannons,there is legislation in Congress requiring that they be produced in a particular USplant. Such requirements can also be buried in the annual DefenseAppropriations bill – for example, in relation to small arms, DoD is required tojustify the need to buy offshore.

- There is no grant-back given for changes made to products by the licensee (acommon element of licensing systems in the area of non-defence goods, as theoriginal owner then benefits from changes made).

- Foreign Comparative Tests (FCT) are tests carried out to assess the best productfor goods not produced in the US. Funds to carry out such tests have beenreduced in 1999, although the defence budget itself had been increased. Also,experience shows that, where an FCT pinpoints a successful product, DoD seeksa licence to produce that product in the US rather than entering into a directsupply contract with the offshore producer. The effect of this practice is that EUsuppliers look for a US production partner early in the process.

- Barriers arising from the use of the Foreign Military Sales Regulation (FMSR).The FMSR introduces maximum foreign content threshold requirements forproducts exported with FMS support. This means that US prime contractorswilling to seek FMS support are reluctant to design foreign content into theirproducts. Instead, they prefer replacing any foreign content by US productionunder licence (e.g. armoured vehicles were obtained under licence from Austriaand then sold on to Kuwait through the FMS system – this took sales to thirdcountries away from European companies).

- Technical data / Technology export control requirements. Non-nationals cannottake their own foreign companies’ technical data out of the US (even if onlyshowing around for sales purposes) unless the US company is granted a licenceto export that data – and consequently rights over the data.

- US subsidiaries. One way of circumventing the US-soil production requirementsis to set up a subsidiary in the US. However, such subsidiaries need to obtainboth security clearance and authorisation to operate. A precondition forobtaining this is that the overseas parent company must relinquish managementcontrol of the subsidiary (US Security Manual). These so-called “Chinese walls”are quite systematically established. Well known examples are within Allison(part of Rolls-Royce) and Tracor (part of BAE Systems).

- Lack of access to bidders conferences / security clearance considerations.Foreign nationals rarely have access to bidder conferences and other pre-contractaward procedures, because they are not granted the required security clearancesat that stage of the procurement process.

- Congressional approval of the defence budget. The defence budget is approvedline-by-line and Congress regularly strikes out lines, including procurementprogrammes. The effect is that defence contractors lobby Members for supportfor individual programmes, offering inducements in return – sometimes ensuring


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that production capability will be located in Members' districts. This representsa kind of “regional juste retour” built into the budget approval process. As anexample, the company developing a particular missile programme ensured that49 States benefited from that particular programme, thereby ensuring thatprogramme's survival in the budget.

BearingsCongress has imposed a Buy America requirement on the procurement of ball androller bearings since 1988, most recently to the end of the year 2000. In May 1996,the Federation of European Bearings Manufacturers’ Association (FEBMA) made asubmission to DoD, in opposition to the restriction. The 1997 DoD AuthorizationAct contains the so-called “McCain Amendment” authorising DoD to waive BuyAmerica requirements that would impede the reciprocal procurement of defence itemsunder the MOU. The EU and 21 NATO countries asked for the effectiveimplementation of the McCain Amendment and the termination of discrimination vis-à-vis imports from countries with which DoD has signed defence cooperationagreements, thus supporting FEBMA’s position. The DoD’s implementing interimrule was published on 24 June 1997 and included bearings. However, the waiverapplicable to bearings may be of limited value since it does not apply toprocurements made with funds subject to Buy American requirements under theDefense Appropriations Acts.

Iron, Steel and Non-Ferrous Metals

The main problem for the steel sector is the imposition of local content requirementsor the preference given in works and other government procurement contracts forbids that include locally produced steel. This practice is notably common at the sub-federal level. Many States (such as Connecticut, Louisiana, Maine, Michigan,Illinois, Maryland, New York, Pennsylvania, Rhode Island and West Virginia) havesuch requirements that also apply to private contractors and subcontractors.

Telecom Equipment

SanctionsAs a result of the failure to liberalise purchases of telecom equipment, the USdecided in 1993 to impose sanctions against the EU and certain Member States underTitle VII of the Omnibus Trade and Competitiveness Act of 1988. The sanctions barEU suppliers from bidding, inter alia, for US Federal government contracts that arebelow the threshold values of the WTO Agreement on Government Procurement.The EU responded with counter-sanctions (Regulation1461/93) that also bar USbidders from applying for contracts awarded by central government agencies belowthe threshold values. Following the bilateral Marrakech procurement agreement ofApril 1994, which liberalised around US$ 100 billion of procurement opportunitieson both sides, the EU considers that the sanctions are an unnecessary impediment tothe bilateral relationship. Following the liberalisation of the EU telecoms sector, theUS Administration has started to investigate the possibility to mutually lift thesanctions and counter-sanctions.

EC Actions in thecontext of the WTOAgreement onGovernmentProcurement (GPA)

Many of the problems experienced by EU suppliers in acceding procurementopportunities in the US could be solved by an increase of the coverage of the GPAand by the elimination of the exceptions introduced in the US GPA offer. Thus,apart from other initiatives, the EC considers that the current review of the GPAoffers a good opportunity for the improvement of the situation.


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4.7 Trade Defense Instruments

1916 AntidumpingAct

The US maintains in force its 1916 Antidumping Act, which prohibits the import andsale of products “at a price substantially less than the actual market value in theprincipal markets of the country of their production.” A Trade Barriers Regulationprocedure on the US Anti-Dumping Act of 1916 was initiated on 25 February 1997further to a complaint by Eurofer (European Steel Industry). The investigationsconducted by the Commission confirmed that the US authorities’ failure to repeal the1916 Act is in several respects not in conformity with the obligations of the US underthe WTO Agreement, the GATT 1994 and the WTO Anti-Dumping Agreement.Infringements relate notably to the type of remedies available, the lack of proceduralrules and of standing requirements, the definition and qualification of the injuryconcept, the criteria for the calculation of the normal value, and the absence of therequirement to introduce products into the commerce of another country as aprerequisite for dumping to take place.

In addition to a still pending Court action in Utah, there are indications that furtherCourt actions under the 1916 Act could be brought against several steel importers ofEU products, thus transforming the 1916 Act into an alternative to the conventionaland WTO-compatible anti-dumping rules for use by the US industry.

Despite numerous offers made by the Commission services, the US authorities didnot appear willing to reach an amicable settlement. Under these circumstances, aCommission decision to request formal WTO consultations was published in theOfficial Journal on 28 April 1998. At the occasion of the consultations of 29 July1998, the Commission reiterated its concern to resolve the case on an amicable basis.Meanwhile, in November 1998, a new Court action under the 1916 Act, involvingsteel imports from Russia and Japan by subsidiaries of EU companies, was initiatedbefore the Ohio District Court (in which part of the defendants made an out-of-courtsettlement with the plaintiffs in early 1999). On 7 March 2000 a US printing pressmanufacturer filed a complaint under the 1916 Act against German (and Japanese)producers of large newspaper printing presses in US District Court for the NorthernDistrict of Iowa.

A panel was established on 1 February 1999. The panel report was circulated on 31March 2000. The panel’s conclusions were that the 1916 Act violates Articles VI:1and VI:2 of GATT 1994, several provisions of the Anti-Dumping Agreement andArticle XVI:4 of the Agreement Establishing the WTO and recommends that theDSB request the US to bring the 1916 Act into conformity with its obligations underthe WTO Agreement. The US appealed this ruling, together with a ruling on asimilar case brought by Japan.

Safeguard measureon steel wire rod

On 1 March 2000 the US introduced a tariff quota of 1.58 million net tons onimports of steel wire rod. The quota will remain in place for three years. Importsexceeding this quota will be subject to an additional import duty of 10 % in the firstyear, 7.5 % in the second year and 5 % in the third year. The quota level willincrease by 2% annually.

Safeguard measureon welded line pipe

On the same day, the US introduced a safeguard measure on imports of welded linepipe. The measure consists of an additional 19 % import duty, which will remainin place for three years, but which will not apply to the first 9,000 net tons of linepipe originating in each exporting country. The duty will be reduced to 15% in the


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second year and 11% in the third year. This measure has also entered into force on1 March 2000.

The Commission intends now to react to the US measures in both the steel wire rodand the welded line pipe cases by suspending equivalent concessions under Article8 of the WTO Safeguard Agreement (SA). This Article affords exporting countriesthe right to obtain trade compensation. Since the US failed to offer any tradecompensation, the EC is entitled to suspend equivalent concession. Such asuspension would not have any immediate effect in practice, given that Article 8(3)SA stipulates that the right of suspension shall not be exercised for the first threeyears that a WTO compatible safeguard measure is in effect (that is why the USmeasures have been limited to such duration). However, it would send a clearsignal to the US that the EC is ready to fully use its rights under the SA and that thesuspension would immediately take effect should the US decide to extend themeasures and/or should the Dispute Settlement Body (DSB) find that the USmeasures do not conform to the SA.

Sunset reviews oncountervailing duties

In May 2000, the Commission raised with the DoC and the USTR the issue of sunsetreviews of countervailing duty measures against EC Member States. TheCommission cited several cases where DoC had found subsidisation to have fallenbelow the "de-minimis" level of 1% set out in the Agreement on Subsidies andCountervailing Measures (SCM) Agreement, but had nevertheless determined thatsubsidisation would continue at the rate found in the original investigation, and hadthus recommended the extension of the countervailing duties. The Commissionwarned the US authorities that WTO dispute may be requested if measures weredefinitively extended on the basis of such findings.

Countervailing dutieson pasta from Italy

On 24 July 1996, the DoC imposed antidumping and countervailing duties on pastafrom Italy. The latter contain a component designed to countervail EU exportrefunds granted on cereals used in the manufacturing of pasta. This measure is inbreach of item 8 of the US-EC Pasta Settlement of 1987.


Safeguards onimports of wheatgluten

On 1 June 1998 the US imposed safeguard measures in the form of a quota onimports of wheat gluten frominter alia the EU. The EU considers that thesemeasures are in violation of Articles 2, 4, 5, 8 and 12 of the WTO Agreement onSafeguards, Article 4.2 of the Agreement on Agriculture and Articles I and XIX ofGATT 1994. Additionally, the measures impair a significant trade interest, the EUbeing the major supplier of the product and its trade being cut by 40% from 1997levels. In two rounds of bilateral consultations the US did not provide an adequatejustification of the measures. On 14 August 1998 the EU withdrew "substantiallyequivalent" concessions by imposing a tariff quota on imports of corn gluten feedfrom the US effective 1 June 2001 or upon the declaration of a WTO panel that theUS measures are not in compliance with WTO rules. This action was based onArticle 8 of the WTO Agreement on Safeguards and duly notified to the WTO on 29July 1998. On 4 May 1999 the EU requested WTO dispute settlement consultations.As these consultations proved inconclusive, the EU requested a WTO panel that wasestablished on 26 July 1999. A ruling is expected in July 2000.

The protectionist nature of the US safeguard measure is likely to be compounded bymodifications to the management rules of the quotas.

Iron, Steel and Non-Ferrous Metals


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Countervailing dutieson certain hot-rolledlead and bismuthcarbon steel productsoriginating in the UK

In June 1998, the EU initiated a WTO dispute settlement procedure against the DoCcountervailing methodology with respect to privatisation of the European companyBritish Steel. The Commission holds that the US practice of countervailing pre-privatisation subsidies without showing whether the privatised company has obtaineda benefit constitutes a violation of the ASCM. Consultations under the DSU on thisissue were held with the US in Geneva on 29 July 1998. A panel to examine theissue was established at the DSB meeting of 17 February 1999. On 23 December1999 the panel found in favour of the EC and condemned the US methodology.These findings have been confirmed by the WTO Appellate Body on 10 May 2000.The Commission expects the US to take into account the findings of the WTO panelin ongoing CVD investigations involving EU companies where similar issues are atstake.

4.8 Export Restrictions

Export controlsA comprehensive system of export controls for dual-use items was established underthe Export Administration Act (EAA) of 1979 and the US Export AdministrationRegulations (EAR) to prevent trade to unauthorised destinations. This system,among other things, requires companies incorporated and operating in EU MemberStates to comply with US re-export controls. This includes compliance with USprohibitions on re-exports for reasons of US national security and foreign policy.The extraterritorial nature of these controls has repeatedly been criticised by the EUand its Member States, given the fact that the latter are active members of allinternational export control regimes: the Nuclear Suppliers Group, the AustraliaGroup, the Missile Technology Control Regime and the Wassenaar Arrangement (seeIran Non-Proliferation Act 2000 in chapter 2, providing for US sanctions on thirdcountries lawful exports to Iran, by expanding the scope of export controls beyondthose multilaterally agreed upon).

Serious concerns have also been raised by the 1988 US Trade Act’s amendment toSection II of the EAA providing for sanctions against foreign companies which haveviolated their own countries’ national export controls, if such violations aredetermined by the President to have had a detrimental effect on US national security.The possible sanctions consist of a prohibition of contracting or procurement by USentities and the banning of imports of all products manufactured by the foreignviolator. These sanctions would appear to be contrary to the GPA.

SatellitesSince 1999, the jurisdiction for export controls on commercial communicationssatellites as well as parts and components and related technical data has beentransferred by Congress (National Defense Authorisation Act) from the CommerceDepartment to the State Department, thus subjecting them to tighter controls.Relevant goods or technologies, previously listed as dual-use goods, have been addedto the US munitions list. Exceptions were provided by Congress calling for anexpeditious treatment of export licence requests for NATO and major non-NATOallies. However in practice this exception was not implemented with the USAdministration retaining a wide latitude for imposing additional export controlrequirements, also on NATO countries, as it sees fit for reasons of national security.These strict controls, including monitoring of technical exchanges with EU firms maydelay satellite launches and impair European launch providers from serving the UScommercial market (US Government launches are reserved for American providers


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according to the Commercial Space Act adopted in 1998). They also negativelyimpact manufacturers of satellites and components which rely on US parts andimpair the ability of EU firms to reply to US bids for tender. Moreover, it alsoimpacts negatively on European insurers of launches of US satellites whose access tothe technical data required to assess the insurance risks has been hampered. Aprovision in the FY2000 Consolidated Appropriations bill signed into law inNovember 1999 attempted to clarify the so-called “NATO/non-NATO major alliesexception.” Pursuant to this provision, a new regulatory regime for export licenses toUS allies was announced in May2000 and is to come into effect in July 2000. Itremains to be seen whether this regime adequately addresses the difficulties causedby the transfer of jurisdiction.

EncryptionWith the digital age, the need has evolved for improved protection in a number ofareas, including personal data, trade secrets and databases, against unauthorised use.A strong example where this need is obvious is electronic commerce. In March1997, the OECD Council adopted a Recommendation on Guidelines forCryptography Policy setting out principles to guide countries in formulating policiesand legislation relating to the use of cryptography.

At present, both the EU and the US operate export control regimes to limit the cross-border movement of the strongest encryption products. On 30 December1996, newUS export control regulations were published that transferred the licensing ofcommercial encryption products from the Department of State to the Department ofCommerce and mandating key recovery until 31 December 1998. A new interimfinal rule was published on 14 January 2000. The rule amends the ExportAdministration Regulations (EAR) to allow the export and re-export of anyencryption commodity or software to individuals, commercial firms and other non-governmental end users in all destinations; it also allows exports and re-exports ofretail encryption commodities to all end users in all destinations; post exportreporting requirements are streamlined and the changes of the WassenaarArrangements are incorporated (Cryptography Note). The restrictions on terroristsupporting states (Cuba, Iran, Iraq, Libya, North Korea, Sudan and Syria), theirnationals and other sanctioned entities are not affected by this rule. This new rulecould pose potential problems such as a different treatment for use by governmentbodies, Internet and telecommunications service providers for which existing ornew restrictions apply. The notion of “US subsidiaries” in Section 740.17. couldcreate a competitive disadvantage, especially for the development of new productsas European firms based in the US will have their products “technically reviewed”and as a “supplementary information” provision is required for foreign companiesto apply for Encryption Licensing Arrangements (ELAs) in order to obtaintreatment equivalent to that extended to foreign subsidiaries of US parentcompanies. The nearly generalised introduction of the technical review ofencryption products above a certain key length in advance of sale, creates adifficulty for the European industry for cases of re-export. The newly created rulesapplicable to retail encryption commodities and software, in particular theeligibility criteria (functionality, sales volume, distribution methods, ability tomodify products and the level of support by the supplier), will probably be subjectto divergent interpretations. The effect of the Cryptography Note, as introduced inthe Wassenaar Arrangement, is reduced by the US authorities through theintroduction of two new requirements: “crypto functionality should not be modifiedor customised” and “the items cannot be network infrastructure products such as


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high end routers or switches designed for large volume communications”. Thelatter items still need to be licensed.

The practical effects of this remain to be seen. A combination of the continuingconstraints on the export of strong encryption products and on the interoperability ofsystems employing such technology inhibits not only trade in encryption productsbut, more importantly, the effective growth of electronic commerce. Moreover, manymodern encryption techniques are patented and licenses may be required to allowsales of European products in the US. Thus, significant barriers to internationaltrade in encryption products without key recovery continue to exist.

4.9 Subsidies

Transparency in the area of subsidies is an obligation of the WTO Agreement onSubsidies and Countervailing Measures. Up to1998, the US only notified the WTOof a limited number of Federal programmes, many of which were relatively small,and refused to notify its many State-level subsidies. However, following pressurefrom the EU, in the form of detailed questions and a counter-notification underArticle 25.10 of the Agreement, the US finally began to notify certain state-levelsubsidies in its new and full notification of 1998.

This notification was reviewed in the WTO Subsidies Committee in May 1999. TheEU still remains concerned by the lack of information on US State-level subsidies,particularly large, ad-hoc investment incentives. The reporting of Federal subsidieshas improved, although there are still gaps as regards certain sectors, notablyaerospace. The US undertook to include non-notified subsidies, including thoseidentified by the EU, in the next update notification. This update, which should havebeen provided in 1999, has now been promised for September 2000.

Aircraft

The large civil aircraft (LCA) sector is generally subject to the WTO rules onsubsidies (1979 GATT Agreement on Trade in Civil Aircraft), but more specificmultilateral rules are required to restrict all forms of government support andintervention for aircraft products. The EU regrets that, at the end of the UruguayRound negotiations, the US blocked the adoption of a new Civil Aircraft Agreementsupported by all other negotiating parties. Although negotiations have continuedsince, no progress has been made.

LCA AgreementBilaterally, the EU and the US started negotiations for the limitation of governmentsubsidies to the LCA sector in the late 1980s. Such negotiations were concluded in1992 with the signature of the EC-US Agreement on Trade in Large Civil Aircraft(O.J. L 301 of 17 October 1992) which focuses on the limitation of both direct andindirect government support. The Agreement suffers from an important divergencebetween the US and the EU in the way to interpret the indirect support disciplineand, on the European side, there is the concern that its implementation has created anincreasing imbalance of obligations. In fact, despite the very high level of USfunding for its civil aircraft industry, which since 1992 has not abated, USrepresentatives have continued to argue that only a negligible fraction should beconsidered as a benefit for US industry. The EU is surprised that the US did notorganise in 1999 the consultations, which they were supposed to hold further to the


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Bilateral Agreement.

Support from theNASA aeronauticsbudget

In particular, in the face of very large public funding for NASA aeronautics R&Dbudgets, the US has so far denied the existence of benefits to the US LCA industry.For instance, a conservative estimate of NASA’s aeronautics budget for 1998amounts to US$ 1.13 billion. According to estimates carried out for the EU, about70% of NASA’s aeronautics spending can be classified as support to the US LCAindustry. In FY 1998, the DoD spent about US$ 5 billion on R&D for thedevelopment of aircraft and related equipment. This translates into benefits to thecivil aircraft manufacturers between US$ 698 million and 1,17 billion. Finally, theFederal Aviation Administration (FAA) has an annual aeronautics budget forresearch and development that exceeds US$ 2 billion. One of the FAA’s statedobjectives is “to foster US civil aeronautics”. However, the US declared that only anegligible proportion of this spending has turned out to be an identifiable (indirect)support to the US LCA industry. It should be added that Boeing benefited in 1999from a prohibited export subsidy (FSC) of $230 million.

According to EU estimates, for the FY 1998, US LCA manufacturers receivedindirect support in the range of 5.2% to 7.4% of their commercial turnover. This iswell above the 3% limit set by the 1992 Bilateral Agreement.

Supersonic aircraftprogramme

Another area of great concern to the EU industry is the NASA programme for HighSpeed Civil Transport (HSCT) for the future development of a new supersonicaircraft to succeed Concorde. Although the programme is rumoured to be windingdown, this has yet to be formally confirmed and benefits from the work alreadydone will flow into the subsonic aircraft sector in any event. The US aircraft andaero-engine industry have been closely working with NASA on this project whichhas been funded at the level of more than US$ 200 million per year. US industry setthe initial research parameters, it defined NASA’s research priorities with respect toHSCT, it was awarded NASA HSCT contracts to perform the needed research andit is protected from sharing valuable data and results with others.

Active support fromthe Administrationand Congress

Finally, it must be underlined that the US Administration has taken a very activestance in favour of the domestic aircraft industry not only through R&D governmentfinancing (subsidies), but also by means of high-level political leverage with thirdcountries’ airlines (inducement). In 1999, the EU has raised the issue of blatantinducement in Israel at the GATT Committee on Trade in Civil Aircraft.

The Federal Aviation Administration has also been used to support Boeing. InJanuary 2000, it decided to modify the operating rules for twin-engine aircraft(ETOPS), helping the competitive position of the B-777 vis-à-vis the A-340. InApril 2000, the Secretary of Transportation was granted discretionary authority notto grant landing & take-off rights ("slots") at four US airports for airlines which didnot fly Boeing with the passage of the AIR-21 FAA reauthorisation legislation. Thisconstitutes discrimination violating three international agreements (the EC-US 1992Bilateral, the 1979 GATT Agreement on Civil Aircraft and the 1994 GATT).

Shipbuilding

OECD ShipbuildingAgreement

The signing of the OECD Shipbuilding Agreement in December 1994, which ismeant to eliminate aids in the shipbuilding sector, was a major achievement and wasexpected to have a significant impact on US and all other signatories subsidyprogrammes and unfair practices in the shipbuilding sector. The Agreement aims toeliminate all direct and indirect support and to combat injurious pricing practices.


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Standstill provisions on existing subsidy levels and on new measures of supportbefore the entry into force of the Agreement had been accepted within the Final Actof the Agreement.

In December 1995 the EC, South Korea and Norway deposited their instruments ofratification for the Agreement. Japan did so in June 1996. The failure of the US toratify it is a matter of great concern. Opposition in the Congress originating fromthe naval industry did not allow the US to ratify it. Despite several attempts duringthe past years, no bill concerning the implementing legislation has moved inCongress in the last few years. The EU continues to request the ratification of theOECD Agreement by the US and to monitor the impact of the existing subsidyprogrammes. There are no real prospects of US ratification in 2000, but USindustry’s concerns about unfair competition by Korean yards could relaunch theprocess in the future.

SubsidiesFrom 1980 until 1994 US shipbuilders did not succeed in building for export. Thedomestic market for the Navy and the protective Jones Act (which reserves theconstruction of the vessels used for coastwise traffic to US shipbuilders) providesshipyards with orders. Production was less than 100,000 gross tonnes (gt) in1993while the available capacity was 250,000 gt. However, during the period 1994-1998, the deliveries grew up to 641,000 gt. The US shipbuilding industry nowrepresents 2% of the world market and the potential capacity, taking into account re-conversion of military installations, is estimated at 1.1 million gt. The MerchantMarine Act of 1936, as amended, provides for various shipbuilding subsidies andtax deferments for projects meeting domestic-built requirements. These are providedvia the Operating Differential Subsidy (ODS), the Capital Constructions Fund(CCF) and the Construction Reserve Fund (CRF). These measures will have to bemodified by the US Congress before the entry into force of the ShipbuildingAgreement.

On 5 December 1997, Vice President Gore announced that up to US$ 80 million infederal funds, part of a US$ 400 million aid package, would be available to completethe revitalisation of the Philadelphia naval shipyards, to be managed by the Kvaernergroup. State and local authorities would finance the remainder of this package. Inaddition to the federal funds for training, US$ 320 million of sub-federal subsidiesgranted to the yard would be inconsistent with the US commitments not to introducenew measures of support or to increase the level of the existing measures.

In addition the US administration introduced a new programme, the so-called“Capability Preservation Agreement Scheme” included in H.R.1119, signed intolaw on 18 November 1997 (PL 105-85). This scheme allows qualified shipyards toclaim for reimbursement on their US Navy shipbuilding contracts for certain costsattributable to work on their commercial shipbuilding.

Loan guaranteesThe Merchant Marine Act also established under Title XI, the Guaranteed LoanProgram (formerly known as the Federal Ship Financing Guarantee Program) toassist in the development of the US merchant marine by guaranteeing constructionloans and mortgages on US flag vessels built in the US. In 1993 the guaranteeprogramme was extended to cover vessels for export. An attempt to also extendTitle XI coverage to all Jones Act vessels could come under consideration in theSenate. As of 1 October 1997, approved applications for construction guaranteesinvolved 11 companies and 40 vessels, with 17 applications pending. During fiscalyear 1997, Congressional authority for the Title XI program had a cap of US$ 12billion, with US$ 11.15 billion allocated to the Maritime Administration (MARAD)


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and US$ 850 million authorised to guarantee the financing of fishing vessels andfisheries facilities by the National Oceanic and Atmospheric Administration. TitleXI guarantees for eligible export vessels are limited to US$ 3.0 billion. As of 1October 1997 Title XI guarantees in force aggregated approximately US$ 2.6billion, covering approximately1933 vessels and 116 individual ship owners. In1998 US$ 734 million in Title XI loan guarantees were approved by MARAD forthe shipbuilding sector, covering 70 vessels and barges. Up to April 1999 US$ 1.5billion has already been approved, of which US$ 1.1 billion is available for theconstruction of 2 cruise ships at Ingalls Shipyard, a category which has not beenbuilt in the US for 30 years. The OECD implementing legislation will have toprovide for the amendment of these loan guarantees in order to put them inconformity with the rules of the 1994 Understanding on export credits for ships,which would have entered into force together with the OECD agreement. The USindustry would like to retain this scheme which has helped to revitalise the sector.


Export EnhancementProgram

The US operates a range of programmes designed to subsidise and/or promoteexports of US agricultural products. The US has continued to maintain anaggressive export policy for agricultural products. The recent Farm Bill adopted byCongress has confirmed this approach.

The Export Enhancement Program (EEP) allows US exporters to apply for a cashsubsidy designed to make US products competitive with subsidised exports fromother countries. EEP has been capped at US$ 350 million in fiscal year1996, butapplies to products exported to over 70 countries. Currently operating in the samemanner as EEP is the Dairy Export Incentive Program (DEIP) which is also usedfor market development purposes. Although EEP funds have not been utilised inrecent years due to high world market prices, the recent decline in commodity priceshas increased pressure from Congress for their full use.

The Market Access Program (formerly the Market Promotion Program) offers ashare of costs for promotion campaigns for agricultural products (the majority beinghigh value and value added) in selected export markets. The Farm Bill providesUS$ 90 million annually for fiscal years1996-2002.

The Export Credit Guarantee Program offers US government guarantees of short-term GSM-102 (6 months - 3 years) and medium-term GSM-103 (3-10 years)private bank loans at commercial interest rates. It is targeted at countries whichneed guarantees to secure financing but show a reasonable ability to repay. Theprogram includes a specific list of commodities per country allocation. It hasrecently become the main export policy tool of USDA, with annual allocationsexceeding US$ 5 billion and declared annual subsidy levels of over US$ 400 million.The program has a default rate of over 10% historically, and it is characterised byuncertainty (and lack of transparency) with respect to the implicit subsidycomponent stemming from rescheduling of payments. To date no agreement on rulesgoverning export credit guarantees in agriculture (under Article 10.2 of the URAgreement on Agriculture) has yet been reached due to US objections. TheEmerging Markets Program is funded under the Farm Bill for approximately US$ 1billion during fiscal years1996-2002 with US$ 10 million annually for technicalassistance.


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5. INVESTMENT RELATED MEASURES

5.1 Direct Foreign Investment Limitations

National securityconsiderations: theExon-Florioprovisions

Section 5021 of the 1988 Trade Act, the so-called Exon-Florio amendment,authorises the President to investigate the effects on US national security of anymerger, acquisition or take-over which could result in foreign control of legal personsengaged in interstate commerce. This screening is carried out by the Treasury-chaired Committee on Foreign Investment in the US (CFIUS). The length of timetaken by the screening process and the legal costs involved can act as a deterrent toforeign investment. Moreover, should the President decide that any such transactionsthreaten national security – which is widely interpreted -- he can take action tosuspend or prohibit these transactions. This could include the forced divestment ofassets. There are no provisions for judicial review or for compensation in the case ofdivestment. Since being introduced, the scope of Exon-Florio has been furtherenlarged:

• Since 1992, an Exon-Florio investigation must be made if a foreigngovernmentowned entity engages in any merger, acquisition or take-over which gives it control ofthe company. Further provisions contain a declaration of policy aimed atdiscouraging acquisitions by and the award of certain contracts to such entities;

• The 1993 Defense Authorization Act requires a report by the President toCongress on the results of each CFIUS investigation and by including, among otherfactors to be considered, “the potential effect of the proposed or pending transactionon US international technological leadership in areas affecting US national security”-- again blurring the line between industrial and national security policy.

The Exon-Florio provisions thus inhibit the efforts of OECD members to improve thefree flow of foreign investment and could conflict with the principles of the OECDCode of Liberalisation of Capital Movements and the National TreatmentInstruments, although the US has notified reservations under the instruments forExon-Florio.

Uncertainties aboutimplementation

While the EU understands the wish of the US to take all necessary steps to safeguardits national security, there is continued concern that the scope of application may becarried beyond what is necessary to protect essential security interests. In thiscontext, the EU has drawn attention to the lack of a definition of national securityand the uncertainty as to which transactions are notifiable. Although the USTreasury’s implementing regulations, which were published in November 1991, didprovide some additional guidance on certain issues, many uncertainties remain.Coupled with the fear of potential forced divestiture, many if not most, foreigninvestors have felt obliged to give prior notification of their proposed investments. Ineffect a very significant number of EU firms’ acquisitions in the US are subject topre-screening.


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Foreign ownershiprestrictions

With regard to foreign ownership, the US has informed the OECD of a number ofadditional restrictions that it justifies “partly or wholly” on the grounds of nationalsecurity. Foreign investment is restricted in coastal and domestic shipping under theJones Act and the US Outer Continental Shelf Lands Act, which includes fishing,dredging, salvaging or supply transport from a point in the US to an offshore drillingrig or platform on the Continental Shelf. Foreign investors must form a USsubsidiary for exploitation of deep-water ports and for fishing in the US ExclusiveEconomic Zone (Commercial Fishing Industry Vessel Anti-Reflagging Act of1987).Under the American Fisheries Act of 1998, fishing vessel owning entities must be atleast 75% owned and controlled by US citizens in order to document a vessel with afishery endorsement. Licences for cable landings are only granted to applicants inpartnership with US entities (Submarine Cable Landing Licence Act of 1921).

Under the Federal Power Act, any construction, operation or maintenance of facilitiesfor the development, transmission and utilisation of power on land and water overwhich the federal government has control are to be licensed by the Federal EnergyRegulatory Commission. Such licenses can only be granted to US citizens and tocorporations organised under US law. The same applies under the Geothermal SteamAct to leases for the development of geothermal steam and associated resources onlands administered by the Secretary of the Interior or the Department of Agriculture.Regarding the operation, transfer, receipt, manufacture, production, acquisition andimport or export of facilities which produce or use nuclear materials, the NuclearEnergy Act requires that a licence be issued but the licence cannot be granted to aforeign individual or a foreign-controlled corporation, even if there is incorporationunder US law.

Conditional NationalTreatment

The principle of National Treatment -- that foreign direct investment should not betreated less favourably than domestic enterprises in like circumstances -- is one of thepillars of the liberalisation in the world economy and a well established legal standardin bilateral treaties and multilateral agreements. In OECD member states as well asworldwide, there has been a trend to remove barriers to the entry of foreigninvestment and to extend the application of national treatment by gradually removingexisting restrictions. However, in the US, as in other countries, some long-established exceptions to this principle still exist thus giving rise to instances ofConditional National Treatment (CNT).

CNT generally relates to the treatment of foreign-owned firms that is less favourablethan that of domestic firms. The conditioning of investment may take the form of:

Reciprocity Specific reciprocity requirements: the investment is allowed only to the extent that“comparable” or “equivalent” opportunities are available to US firms in the homecountry of the investor. In some cases, such requirements may not even be related tothe sector in which the foreign company wants to be economically active in the US(“cross-sectoral reciprocity”).

Performancerequirements

Performance requirements: relating either to the contribution of the foreign controlledcompany’s activities to the US economy and employment, or to the realisation ofspecified parameters of production (volume, local content).

Public SubsidiesThe EU has become increasingly concerned over recent years about US legislationtaking the form of tests on whether a company, legally established in the US butwhose ownership is foreign, meets certain conditions and requirements. CNTlanguage is most notable in the area of science and technology and concerns thegranting of Federal subsidies for research and development, or other advantages, to


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US-incorporated affiliates of foreign companies.

Examples of conditional national treatment can be found in the American TechnologyPre-eminence Act of 1991 that authorises the Advanced Technology Program, anindustry-led, cost-shared R&D programme, designed to develop high risktechnologies that the private sector is unlikely to pursue without government support,the Energy Policy Act of 1992 that authorises Federal programmes and joint venturesbetween industry and government laboratories in energy-related R&D, the NationalCo-operative Production Act of 1993, which extends the favourable antitrusttreatment applying to joint R&D ventures, to joint manufacturing ventures and theAdvanced Lithography Program which deals with research on semiconductormaterials and processes.

Although US subsidiaries of European firms have been able to participate in USprogrammes, the fact remains that satisfying the eligibility conditions can be a morecumbersome process for foreign-owned companies.

5.2 Tax Discrimination

Cumbersome anddiscriminatoryreportingrequirements

The information reporting requirements of the US Tax Code as applied to certainforeign-owned corporations mean that domestic and foreign companies are treateddifferently. These rules apply to foreign branches and to any corporation that has atleast one 25% foreign shareholder. They require the maintenance, or the creation, ofbooks and records relating to transactions with related parties. The documents mustbe stored at a place specified by the US tax authorities and an annual statement filedcontaining information about dealings with related parties. There are stiff penaltiesfor non-compliance with the various provisions. These requirements are onerous.Although their purpose, the prevention of tax avoidance and evasion, is reasonable,they are burdensome and add to the complexity for foreign-owned corporations ofdoing business in the US.

“Earnings stripping”provisions

The so-called “earnings stripping” provisions in Internal Revenue Code 163j limit thetax deductibility of interest payments made to “related parties” which are not subjectto US tax, and of interest payments on loans guaranteed by such related parties. Inpractice, most “related parties” affected will be foreign corporations.

Internationallyagreed approachoverlooked

The provisions are designed to prevent foreign companies from avoiding tax byfinancing a US subsidiary with a disproportionately high amount of debt ascompared with equity, with the result that profits are paid out of the US in the formof deductible interest payments rather than as dividends out of taxed income. Thisobjective is reasonable and in line with internationally agreed tax policy. However,the US rules for calculating the ceiling in any year on the amount of admissibleinterest uses a formula, the results of which can be inconsistent with theinternationally accepted arm’s-length principle. If, ultimately, this leads to thedisallowance of relief for the interest payable, it could have discriminatoryconsequences because a tax treaty partner would not be obliged to make acorresponding adjustment to taxable profits in the other country. The provisionsrelating to loans guaranteed by related parties could also disallow the interest on anumber of ordinary commercial arrangements with US banks and provide adisincentive from raising loans with them.


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State unitary incometaxation: arbitrarycalculations

Certain US States (Alaska, Arizona, California, Colorado, Connecticut, Illinois,Indiana, Iowa, Kansas, Massachusetts, New Hampshire, New Jersey, New York,Ohio, Rhode Island and West Virginia) and the District of Columbia assess Statecorporate income tax for foreign-owned corporations on the basis of an arbitrarilycalculated proportion of their total worldwide profits. This proportion is calculatedin such a way that a company may have to pay tax on income arising outside theState, giving rise to double taxation.

World-wide unitarytaxation

“World-wide” unitary taxation is inconsistent with bilateral tax treaties concluded bythe US at the Federal level. A company may also face heavy compliance costs inproviding details of its worldwide operations. International attention has mainlyfocused on California, which from 1986 has allowed companies to elect for “water’sedge” unitary taxation instead. Under this method, companies are taxed on the basisof a share of their total US (rather than worldwide) income. The 1994 US SupremeCourt ruling that California’s former worldwide unitary tax was constitutional wasnot encouraging. The EU and its Member States remain concerned about unitaryregimes and will keep a watch on possible developments.

Foreign SalesCorporations

US legislation authorising so-called Foreign Sales Corporations (FSCs) (26 USCsections 921-27) provides that, under specific conditions, certain income earned by aforeign subsidiary of a US corporation will not be subject to US tax. The statute’spresumption as to income allocation is questionable and gives rise to an objectionabletax benefit accruing to US firms. The purpose of the favourable tax treatment hasbeen to encourage the export of US manufactured goods. The FSC is generallegislation, applicable to all industrial and agricultural sectors and was recentlyexpanded to cover the software sector.

Subsidies, which are contingent upon, export performance or upon the use ofdomestic over imported goods are strictly prohibited under the WTO. The FSCscheme applies exclusively to the export of goods and these goods must have morethan 50% of their market value of US origin. Therefore, the FSC scheme provides aprohibited subsidy within the meaning of Article 3 of the Agreement on Subsidiesand Countervailing Measures (ASCM).

FSC tax exemptions cannot be justified by the aim to avoid double-taxation for UScompanies established abroad. FSCs are typically established in tax havens whereno income tax is paid at all. For instance, in 1996, 91% of all FSCs wereincorporated in the US Virgin Islands, Guam and Barbados.

The EU also considers that the FSC scheme is an export subsidy within the meaningof Article 1 of the Agreement on Agriculture. On 24 February 2000, the WTOAppellate Body ruled in favour of the EU, as it considered that FSC exemptionsamount to a prohibited export subsidy under the ASCM as well as the Agreement onAgriculture. The US is obliged to withdraw the WTO-incompatible subsidy by 1October 2000 at the latest. Proposals submitted by the US authorities in May 2000did not remove the export contingency aspect of the current FSC scheme. A newproposal is currently under consideration by Congress.


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Aircraft

In terms of its economic impact, Boeing declared in its1999 financial statements thatFSC tax benefits amounted to US$ 230 million. This accounts for about 10% ofBoeing's net earnings for the same year (US$ 2.31 billion). In1998, Boeing savedUS$ 130 million in taxes as a result of FSC on net earnings of US$ 1.12 billion. Interms of market value, it has been estimated that improved earnings due to FSCsubsidies translate into advantages of US$ 1 to 2 billion for Boeing’s marketcapitalisation, allowing it recourse to relatively cheaper capital. The FSC systemtherefore grants a considerable competitive advantage to the US aircraftmanufacturers to the detriment of their competitors.


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6. INTELLECTUAL PROPERTY RIGHTS

6.1 Copyright and related areas

Moral rightsDespite the unequivocal obligation contained in Article 6bis of the Berne Conventionto which the US acceded in 1989 to make “moral rights” available for authors, theUS has never introduced such rights and has repeatedly announced that it has nointention to do so in the future. It is clear that while US authors fully benefit frommoral rights in the EU, the converse is not true, which leads to an imbalance ofbenefits from Berne Convention membership to the detriment of the European side. Itis noted that the US has ratified and implemented the WIPO (World IntellectualProperty Organisation) Copyright Treaty and the WIPO Performances andPhonograms Treaty. Adherence to these Treaties by the US requires legislation onmoral rights at least for performers.

Cross-borderlicensing of musicworks

Following a complaint under the Trade Barriers Regulation concerning obstacles tothe licensing of music works in the US, an examination procedure was initiated on 11June 1997. The complaint was lodged by the Irish Music Rights Organisation(IMRO) and unanimously supported by the Groupement Européen des Sociétésd’Auteurs et de Compositeurs (GESAC). It related to Section 110(5) of the 1976 USCopyright Act that provides for an exemption to the author’s exclusive rights toauthorise the communication of their works to the public (“homestyle exemption”).Concretely, Section 110(5) permits the playing of “homestyle” radios and televisionsin public places (such as bars, shops, restaurants etc.) without the payment of aroyalty fee.

The investigation report, which was submitted to the TBR Committee on 3 February1998, confirms that Section 110(5) violates the US’s obligations under Article11bis(1) of the Berne Convention for the Protection of Literary and Artistic Worksand consequently those under Article 9(1) of the Agreement on Trade related Aspectsof Intellectual Property Rights (TRIPs) Agreement. The report also shows that thispractice has caused a serious deprivation of income to EU right-holders, estimated atbetween US$ 3 and 6 million a year, representing between 10 and 20% of the annualamount of royalties obtained by EU authors for the public performance of their worksin the US.

On the basis of these conclusions, the Commission invited the US to discuss thematter informally. However, the US did not show a willingness to find an amicablesettlement that would be satisfactory for EU right-holders. In addition, on 6 October1998 an amendment was approved by the Congress (“Fairness in Music LicensingAct”) substantially widening the scope of the homestyle exemption. As a result, theeffects on Community right-holders will be worsened. At the request of the EC andits Member States, at the Dispute Settlement Body (DSB) meeting of 25 May 1999, aPanel was established which met in November and December 1999.

On 5 May 2000, the panel issued its final report. The panel’s main finding is that themost important of the two subparagraphs of Section 110(5) is in breach of the US’obligations under the TRIPs Agreement and therefore recommended that the Dispute


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Settlement Body request the United States to bring subparagraph (B) of Section110(5) into conformity with its obligations under the TRIPS Agreement. The reportof the Panel was published on 15 June and will be considered for adoption by theDSB on 27 July. At the time of writing there is no indication as to whether the USwill appeal or as to how it will implement the panel’s recommendations.

6.2 Appellations of Origin and Geographical Indications

Inadequateprotection ofgeographicalindications of winesand designations ofspirits

The amendment to the US trademark law (new subsection 2(a) of the Lanham Act)adopted for the purpose of implementing Articles 23.2 and 24.5 of the TRIPsAgreement creates grounds for refusal or cancellation of a trademark that consists of,or comprises, a geographical indication which, when used on - or in connection with– wines or spirits, identifies a place other than the origin of the good. It does notapply to indications that an applicant first used in connection with wines or spiritsbefore the TRIPs Agreement entered into force. However, Art. 24.5 TRIPs allowscontinued use only of those trademarks used or registered in good faith before1995or before the geographical indication is protected in its country of origin. Thus, itwill have to be closely followed whether the US comply with their TRIPs obligations,by ensuring that a trademark used or registered in bad faith in the US can no longerbe maintained where it is identical with or similar to a geographical indication.

The European Commission and the US government have begun to negotiate abroad-ranging wine agreement, which would include improving the protection ofgeographical indications.

Incomplete BATF listof non-generic names

In April 1990 the Bureau of Alcohol, Tobacco and Firearms (BATF)published a listof examples of “Foreign Non-generic Names of Geographic Significance Used in theDesignation of Wines.” However, many EU appellations of origin and geographicalindications do not figure on this list and the EU indicated to BATF that the list, aspublished, is not satisfactory since it does not ensure sufficient protection of EU winedenominations in the US. A petition to BATF to complete the list of EU protecteddistinctive indications was rejected on the grounds of lack of evidence that the nameswere known to the US consumer.

Semi-generic namesUS regulations allow some EU geographical denominations of great reputation to beused by American wine producers to designate products of US origin. The mostsignificant examples are Burgundy, Claret, Champagne, Chablis, Chianti, Malaga,Madeira, Moselle, Port, Rhine Wine (Hock), Sauterne, Haut Sauterne and Sherry.Despite the fact that in 1997 the D'Amato amendment codified US regulations on theuse of semi-generic wine names in the US into Federal law, some progress was madein the context of the current bilateral negotiations between the US and the EU wherethe US took a conditional commitment to phase out semi-generic names. Thiscommitment as well as all other areas of the protection of geographical indications iscurrently under discussion between the EU and the US.

Grape namesAmerican producers also use some of the most prestigious European geographicalindications as names of grape varieties. This abuse could often mislead consumersas to the true origin of the wines. Furthermore, the improper use of EU appellationsof origin and geographical indications for wines places the respective EU products ata disadvantage on the US market.


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SpiritsWith regard to spirits, an agreement was approved by the EU in February 1994 forthe mutual recognition of two US and six EU geographical indications and providesfor future discussions on the possibilities of extending their mutual recognition. Forthe other EU designations, the US regulations provide a limited protection whichdoes not prohibit their improper use: a geographical indication when qualified byBATF as “non-generic distinctive” may be used for spirits not originating in theplace indicated but with a proviso such as “kind”, “type”, etc. or in conjunction withthe true origin of the product. This is likely to constitute a violation of Article 23.1of the TRIPs Agreement which expressly prevents use of a geographical indicationfor spirits not originating in the place indicated, even where the true origin of theproduct is indicated or accompanied by an expression such as “kind”, “type”,“style”, “imitation” or the like.

6.3 Patents, trademarks and related areas

Measures affectingimported goods

Section 337 of the Tariff Act of 1930 provides remedies for holders of USintellectual property rights by keeping the imported goods which are infringing suchrights out of the US (“exclusion order”) or to have them removed from the USmarket once they have come into the country (“cease and desist order”). Theseprocedures are carried out by the US International Trade Commission (ITC) and arenot available against domestic products infringing US patents. Under the 1988Omnibus Trade and Competitiveness Act, several modifications have beenintroduced to Section 337, such as the availability of remedies in relation to importedgoods that infringe a US process patent. The GATT Panel Report which wasadopted by the Contracting Parties in November 1989 came to the conclusion thatSection 337 was inconsistent with GATT Article III:4. The provision in questionaccords to imported products alleged to infringe US patent rules treatment lessfavourable than that accorded to like products of the US. Some modifications havebeen made to Section 337 in the context of implementing the TRIPs Agreement;however, Section 337 - in its present form - does not eliminate the major GATTinconsistencies raised by the 1989 GATT Panel. As a result, Section 337 appears tocontinue to be in violation of Article III. 4. GATT and, since the entry into force ofthe WTO, of a number of provisions contained in the TRIPs Agreement.

In January 2000, the EC and its Member States requested WTO consultations withthe US on Section 337 which were held in February 2000. During the consultations,the US maintained the view that Section 337 was in compliance with the provisionsof the GATT and the WTO TRIPs Agreement.

In the US, advertising low price perfumes imitating famous European brands andthus benefiting from the well-known reputation of the European brands is notprohibited. This practice may violate Article 6bis Paris Convention (confusion)and/or Article 10bis Paris Convention (unfair competition), as incorporated into theTRIPS Agreement through its Article 2.1.

Government useUnder US law (28 US Code Section 1498) a patent owner may not enjoin or recoverdamages on the basis of his patent for infringements due to the manufacture or use ofgoods by or for the US government authorities. This practice is apparently extremelywidespread in all government departments and it appears to be inconsistent withArticle 31 of the TRIPs Agreement that introduces a requirement to inform promptlya right holder about government use of his patent.


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First to file systemEuropean companies are faced with indirect costs resulting from the 'first-to-invent'system for patent registrations in the US. The US patent system applies the principleof 'first-to-invent' which is only used in the US. The rest of the world follows theprinciple of 'first-to-file', fixing thereby a clearly defined moment when the priorityright to a patent is established. The 'first-to-invent' principle creates severalobstacles for EU and US companies trying to obtain a patent right in the US, namelybecause it has a considerable economic impact on the potential right holder. Theissue has figured on top of the Transatlantic Business Dialogue agenda and the latterhas recommended the adoption of the 'first-to-file' approach in the US.

Section 211 of the USOmnibusAppropriations Act

Congress adopted Section 211 of the Omnibus Appropriations Act in October1998.It prohibits, under certain conditions, the registration or renewal of a trademarkwhich is identical or similar to a trademark previously owned by a confiscated Cubanentity and sets forth that no US Court shall recognise or enforce any assertion ofsuch rights.

In the view of the Commission and the Member States, Section 211 violates severalprovisions of the TRIPs Agreement, notably on national treatment and most-favoured-nation treatment, the protection of trademarks and enforcement. Section211 was already applied in a case involving a European company that was not ableto defend its trademark rights before a US court as a consequence.

At the request of the EC and its Member States of July 1999, WTO consultationswere held with the US on Section 211 in September and December 1999. Theseconsultations, while clarifying the respective positions, did not lead to a satisfactoryresolution. Therefore, in March 2000, the EC and its Member States decided torequest the establishment of a WTO panel; such request was sent to the Chairman ofthe Dispute Settlement Body by letter dated 30 June. The request will be addressedby the WTO DSB on 27 July 2000.

Patentability ofsoftware andbusiness methods

The patentability of software and methods in the US has been identified by many as apotential barrier to entry in markets.


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7. SERVICES

7.1 Business Services

Professional Services

New GATSdisciplines

Following the conclusion of the GATS negotiations in 1993, the access ofprofessional service suppliers to the US has been improved since a number ofnationality conditions and in-State residence requirements have been removed.

Problems at Statelevel

However, despite the improvements contained in the schedule of specificcommitments, access to the US market, where licensing of professional servicesuppliers is generally regulated at State level, remains unsatisfactory. This is mainlydue to the lack of transparency in -- and divergence of -- access conditions at Statelevel, as well as the frequent absence of a transparent regulatory regime for theoperation of foreign professional service suppliers. In addition, the Buy Americaprovision in Section 136 (1) of the Foreign Relations Authorisation Act for fiscalyear 1990-91 gives US companies bidding for contracts to provide guard services forUS embassies a 5% price preference.

Improving outlook?Nonetheless, the situation should improve steadily under the GATS: the WorkingParty on Professional Services has agreed on disciplines applicable to accountancyservices, and the new Working Party on Domestic Regulation will continueworking on the disciplines necessary to ensure that measures relating to qualificationrequirements and procedures, technical standards and licensing requirements in thefield of professional services do not constitute unnecessary barriers to trade. Inaddition, negotiations on market access and on the further liberalisation ofprofessional services will take place as part of the next round of trade liberalisationtalks.

7.2 Communication Services

In spite of the GATS Basic Telecommunications Agreement concluded in 1997 andin force since February 1998, European and foreign-owned firms seeking access tothe US market still face considerable barriers, particularly in the satellite servicessector (e.g. lengthy proceedings, conditionality of market access, de facto reciprocity-based procedures) and the mobile services sector (e.g. investment restrictions andlack of access to frequencies for 3rd generation services). This situation is not in linewith the market access policy advocated by the US, and provides a competitiveadvantage to the significant number of US companies that have already access to theEuropean market in these fields.

US commitmentsunder the WTO Basic

The negotiations on basic telecommunication services, held in the GATS frameworkunder the auspices of the WTO, concluded successfully on 15 February 1997. Atthat time, 69 governments undertook legally binding commitments on access to their


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Telecom Agreement telecommunications services’ market, thereby liberalising a global market fortelecommunications services estimated to be worth approximately US$ 600 billion,i.e. over 90% of total global revenues for telecommunications services. The WTOBasic Telecom Agreement entered into force in February 1998.

The US undertook commitments on most telecommunications services (voicetelephone, data, telex, telegraph, private leased circuit services; local, domestic, long-distance and international; using any kind of technology; etc.), but retained severalrestrictions. Foreign direct investment in common carrier radio licences is limited to20% (indirect investment being allowed up to 100%). The US also kept a marketaccess restriction on satellite-based services, namely the monopoly of Comsat to linkup with Intelsat and Inmarsat (recent US legislation has removed Comsat monopoly,see below).

Late in the negotiation, the US took an exemption to the MFN principle for one-waysatellite transmission of Direct to Home (DTH), Direct Broadcast Satellite (DBS)and digital audio services. The EU reserved its right to challenge this exemption as itapplies to services which are part of the audio-visual commitments undertaken by theUS in 1994 as a result of the Uruguay Round.

In November 1995, in the run-up to the WTO negotiations on a Basic TelecomsAgreement, the US Federal Communications Commission (FCC) had adopted a ruleon entry of foreign-affiliated carriers into the US market, adding a new factor to theCommission’s public interest review for the purpose of granting waivers of Section310 restrictions on foreign indirect investment. Specifically, the FCC introduced an“Effective Competitive Opportunity Test” (ECO-test). The FCC also issued in May1996 a notice of proposed rulemaking (so-called DISCO-II) applying the ECO-test toforeign-licensed satellites. The EU submitted objections in both proceedings. On 25November 1997, the FCC adopted two rulings (a general ruling on foreignparticipation in the US market, and a specific one on the satellite services marketentitled DISCO-II) to implement the commitments of the US in the Basic TelecomAgreement. In these rulings the FCC replaced the ECO-test with a rebuttablepresumption that entry by carriers from WTO countries and by satellites licensed byWTO countries is pro-competitive, but the FCC retained the unclear “public interest”criteria which can still be invoked to deny a licence to a foreign operator, such as“trade concerns”, “foreign policy concerns” and “very high risk to competition”.Although the FCC expressed its intention to only deny market access on this basis inexceptional circumstances -- which are not well defined -- the discretion retained bythe FCC remains of concern to the EU and raises questions as to the compatibility ofthe FCC rules with the US WTO commitments.

Satellite Services

European satellite carriers have encountered in the past few years a number ofproblems to serve the US market1: proceedings by the FCC on spectrum allocationand licensing are not always carried out in an objective, transparent, timely and non-discriminatory manner. Notably, the following cases have been brought to theCommission’s attention: New Skies Satellites N.V.2, Inmarsat Ltd.3 And Eutelsat4.

1 Please note that throughout this paragraph, “a satellite operator applying for market access to the US” means inpractice that one or more US earth station operators apply to the FCC for a license to link up with the satellite(s) ofthat operator. The FCC process entails the allocation of certain frequency bands and/or orbital slots.2 The Netherlands-based New Skies Satellites N.V. (the privatised Intelsat spin-off) was granted market access to theUS in August 1999 to provide Fixed Satellite Services (excluding Direct to Home services) for a 3-year duration only(compared to the standard renewable 10-year term). The FCC considered that New Skies was not independent


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These case show that proceedings by the FCC on spectrum allocation and licensingare not always carried out in an objective, transparent, timely and non-discriminatorymanner, and raise concerns regarding their compatibility with the US WTOcommitments.

In parallel to the individual cases above-mentioned, Congress considered for nearlytwo years legislation that seeks to promote a pro-competitive privatisation of Intelsat,Inmarsat, their successor and spin-off entities. Various bills sought to unilaterallyimpose the specific criteria and timetables for the privatisation of these entities.

The "Open-market Reorganisation for the Betterment of InternationalTelecommunications Act" (ORBIT Act) was finally adopted by Congress and signedon March 17, 2000 by President Clinton. The final text represents an improvementcompared to earlier versions (hopefully as a result of the démarches made by the ECand its Member States). It gives more time, for instance, to these entities to conductIPOs and meet the Act’s privatisation criteria, but it still imposes conditions on entryinto the US market of Intelsat, Inmarsat and New Skies. It contains guidelines for

enough from Intelsat and that, therefore, unconditioned access to the US market could have triggered anti-competitive risks due to potential difficulties for US companies to obtain access to foreign markets from nationalregulatory authorities having a wish to protect New Skies. New Skies plans to make an Initial Public Offering (IPO)of shares as soon as market conditions permit and expects that the results of this IPO will satisfy the FCC (i.e., willresult in a “substantial dilution” of Intelsat Signatories' ownership) and will entitle US licensees accessing New Skies’satellites to the standard 10-year earth station license. This case shows that the US regulation (DISCO II and its“competition criteria”) is actually carried out in a manner that violates US commitments in the WTO (in practice, theFCC still applies a reciprocity mechanism similar to the “ECO-test” by linking market access in the US to marketaccess for US operators in third countries).3 Inmarsat Ltd access to the US market is not yet assured, even though it has been privatised since April1999 and isnow a UK-based company. Therefore, Inmarsat access to the US market should no longer be restricted. The FCC hasissued only Special Temporary Authorisations for earth station operators to link with Inmarsat satellites, at first on theexpectation that a bill setting out criteria for the privatisation of Inmarsat would be passed by Congress. This bill waseventually passed in March 2000 (see below) and on 31 March 2000 the FCC extended by another 180 days theSpecial Temporary Authorisations pending FCC determination as to whether Inmarsat meets the conditions of theAct. This procrastination is inconsistent with the US commitments in the WTO, as the US is bound to grantunconditional market access to satellite companies based in WTO countries.4 Eutelsat (an Inter-Governmental Organisation based in France whose privatisation is planned for 2001) faced lastyear a competing claim by a US company, Loral Skynet, to use a specific orbital location to provide Fixed SatelliteService to and from the US, in spite of the priority rights it had acquired under the ITU process. Eutelsat and Loralfinally came to an agreement in December1999, as it became clear that the FCC would not allow US earth stationoperators to link up with Eutelsat’s satellite at the disputed orbital location in the absence of a settlement with LoralSkynet. In particular, there is a concern that the FCC leveraged its regulatory clout to the advantage of Loral andbrought Eutelsat to the negotiating table. Absent this, and given ITU rules of filing priority, Eutelsat would have hadno incentive to engage into settlement discussions. Eutelsat's existing customers have now received FCCauthorisation to link up with its satellite, and Eutelsat is now waiting for an FCC decision to allow future customers toautomatically link up with its satellite. This case raises questions about the compatibility of US domestic procedureswith the GATS provisions on Domestic Regulation.5 Mainly by calling on the US administration to achieve the bill’s objectives in international fora, by requiring that theUS administration oppose any application by these entities for additional orbital locations in the ITU and by requiringthat the US administration ensure that the US remain the administration responsible for Intelsat notification to theITU.6 Specifically, the bill requires the US administration to pursue a cost-based settlement policy for internationaltelecommunications, and to oppose assignment by competitive bidding of orbital locations or spectrum for theprovision of international or global satellite communications services.


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the US administration to influence the privatisation process of these companies5 andto use that privatisation process to pursue wider objectives6. President Clinton, onsigning this bill into law, has stated that the “provisions of S. 376 could interferewith the President's constitutional authority to conduct the Nation's foreign affairs”and that he “will therefore construe these provisions as advisory”. The Act alsoincludes statutory privatisation criteria which the FCC must apply in order todetermine whether to grant market access to these entities. The President also statedthat the Administration would continue to advise the FCC (which is an independentagency) on matters concerning interpretation of and compliance with US WTOobligations.

However, there is serious concern in the EU that these criteria apply to no othercompetitor, foreign or domestic and could lead the FCC to limit these entities’ accessto the US market, and thereby reduce competition in the US market (contrary to theexplicit intent of the Act to promote competition). In that respect, this Act violatesthe US WTO obligations and should it be used against EU operators interests, theEU reserves its rights to use arbitration procedures under the WTO.

Finally, the US keeps restrictions on the provision of one-way satellite transmissionof Direct to Home (DTH), Direct Broadcast Satellite (DBS) and digital audioservices, following the exemption to the MFN principle taken by the US at the verylast moment of the GATS negotiations on basic telecoms services.

Mobilecommunications

Access of third generation mobile communication systems to the US market could berestricted due to lack of availability of frequencies in that country. This concern hasarisen following the decision in the US to allocate to second generation systems thefrequency bands which had been identified for third generation systems by theInternational Telecommunications Union (ITU) at its World AssemblyRadiocommunications Conference in 1992. These frequency bands are generallyavailable for third generation systems in European and in most of the other countriesthroughout the world, as these countries have followed the ITU recommendation of1992. More clarification from the US side is thus required on how frequencies forthird generation systems will be made available in this country, with a view toensuring that the US market is open to European and foreign country operatorswhich are potential new entrants in the market, as well as to providing the necessaryregulatory certainty to companies interested in investing in these new technologies inthat country.

Radiocommunications

Section 310 of the Communications Act of 1934 remains basically unchangedfollowing the adoption of the new Communications Act of 1996. It containsrestrictions on the holding and transfer of broadcast and common carrier radiocommunication licences: no broadcast or common carrier (or aeronautical en route oraeronautical fixed radio station licence) shall be granted to – or held by – foreigngovernments or their representatives, aliens, foreign corporations, or corporations ofwhich more than 20% of the capital stock is owned or voted by an alien (25% if theownership is indirect subject to public interest waiver). The one change broughtabout by the Communications Act of 1996 was to eliminate the restriction on foreigndirectors and officers.

This situation has not changed through the Basic Telecom Agreement, as limitationson direct foreign ownership of common carriers radio licences have been explicitlyretained in the US offer.

To provide telecommunications services, operators typically need to integrate radiotransmission stations, satellite earth stations and in some cases, microwave towers


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into their networks. Foreign-owned US operators face additional obstacles inobtaining the licensing of these various elements relative to US-owned firms.

Foreign investmentThe US has undertaken commitments in the framework of the Basic TelecomAgreement to suppress restrictions to indirect investment from 1 January 1998.However, the US Administration holds the view that it is not necessary to adoptspecific legislation to abolish such investment restrictions, since the FCC may waivethese restrictions under the current law by invoking the “public interest.” The USAdministration and the FCC consider that this waiver provision is sufficient for theFCC not to apply section 310(b)(4) to WTO Members. This situation does notprovide certainty to European operators.

The US Congress is considering legislation that would prevent participation in UStelecommunications companies by publicly owned foreign companies. In particular,a bill was introduced on 27 June in the Senate by Senator Hollings and a provisionof the appropriations bill for the Departments of Commerce, Justice and State wasadopted on 18 July by the Senate Appropriations Committee, which would preventtransfer of telecommunications licenses to a company that is more than 25% ownedby a foreign government or its representatives.

This would constitute a clear violation of the US commitments in the WTO onforeign investment and it would affect the interests of European companies whichintend to invest in the US. The European Union reserves its right to take anyappropriate course of action should such provisions become law, and would opposeany action, through legislation or otherwise, that would undermine these US WTOcommitments.

Universal ServiceThe current universal service and access charge regimes in the US require furtherclarification, in particular with a view to ensuring that foreign consumers are notsubsidising universal service obligations in the US.

Digital terrestrialtelevision

The US Federal Communications Commission mandated in 1996 an exclusivestandard for digital terrestrial television in the US, ATSC/8VSB. This decision hasprevented the technology developed in Europe, DVB-T/COFDM, from entering intothe US market. There are growing calls from market players in the US for multiplemodulation standards to be allowed to enter into the US market, so as to allowbroadcasters to choose the technology best suited for the innovative services andapplications they want to offer their customers. If the FCC were to ignore marketdemand, it would be in contradiction with the calls for technological neutrality andmarket driven approaches that the US Government has been making in othercommunication fields.

Internet domainnames andcybersquatting

In the context of violations of trade marks and famous marks which have beenreported to us, the Commission welcomes the development of alternative disputeresolution (ADR) for the Internet DNS and has, together with the United States andother countries, supported the recommendations of WIPO for an administrativedispute resolution procedure and the implementation of the ICANN Uniform DisputeResolution Policy.

In parallel to the adoption in August 1999 and the implementation in November 1999by ICANN of the Uniform Dispute Resolution Policy (UDRP), the US enacted theAnticybersquatting Consumer Protection Act in November 1999. This Act whichentitles the owner of a mark registered in the Patent and Trademark Office to file anin rem civil action against a domain name, in the case of a violation of the right ofthe owner of a mark by a domain name in the judicial district in which a domain


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name registrar or registry is located, also allows a plaintiff to elect to recoverstatutory damages between US$ 1,000 and US$ 100,000.

The Commission supports the view that a world-wide system based on the WIPO’srecommendations would be beneficial to the whole Internet community and shouldbe allowed to work through to some results and evaluation rather than being pre-empted by national legislation. Though a thorough analysis of theAnticybersquatting Consumer Protection Act has not been completed so far, theCommission has some reservations about the possible impact that it could have onthe use of the UDRP as trademark owners may prefer to act under the US legislationrather than the UDRP.

The Commission is further concerned by the fact that other countries might enactfurther legislation, similar or divergent, creating a situation of “patchwork”legislation world-wide which could affect the uniform approach proposed under theWIPO and ICANN dispute resolution scheme, in particular at the stage where theWIPO system might be extended to address Famous Names and other categories ofnames dispute.

Therefore the Commission re-affirms its support to the UDRP that has been put inplace by ICANN and WIPO and endorses the outcome of the international workshopon cybersquatting held in Australia on 31st January and 1st February, where it wasagreed that WIPO would be requested to initiate a study and developrecommendations on further issues arising from abusive domain names registration inrelation to the protection of personal and non-protected names within the domainname system.

EncryptionThe Commission expressed concerns about the US regime, considering that acombination of the continuing constraints on the export of strong encryption productsand on the interoperability of systems employing such technology inhibits not onlytrade in encryption products but, more importantly, the effective growth of electroniccommerce. Moreover, many modern encryption techniques are patented and licensesmay be required to allow sales of European products in the US. Thus, significantbarriers to international trade in encryption products without key recovery continueto exist.

7.3 Financial Services

The US financial services sector has been traditionally characterised by industry andgeographic fragmentation, but this situation has been changing over the last severalyears. The application of technology and new flexibility shown by federal regulatorsand upheld by courts has increasingly blurred traditional product distinctions. Thepace of affiliations between banks and securities houses and the conduct of insuranceactivities by banks began picking up prior to the recent enactment of the Gramm-Leach-Bliley Act of 1999 (“GLBA”), and this important legislation has removedadditional legal barriers. Implementation of interstate banking legislation passed in1994 has largely removed the traditional impediments to interstate banking in theUnited States. Electronic commerce is also beginning to have an impact on thedelivery of all kinds of financial products. As a consequence, it is expected that theUS market will look very different in the early 21st century than it does now and thatthere will be increasing convergence between the US and EU financial sectors. Inthis dynamic environment, it is important that EU financial firms be given


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competitive opportunities comparable to those afforded US institutions as new lawsare passed, regulations are adopted and the market evolves. In this regard, theEuropean Commission is working to improve access of European financialinstitutions to US markets in a number of key sectors, including the new financialactivities permitted under GLBA and reinsurance and other wholesale insurancemarkets.

WTO FinancialServices negotiations

Financial services negotiations in the framework of the GATS are particularlyimportant. GATS negotiations on financial services are being relaunched in Genevathis year and provide a forum to seek improved access of EU financial institutionsto US and other markets. A permanent and MFN-based agreement entered into forcein March 1999. All major trading partners of the EU, including the US, are part ofthis agreement, which provides a predictable and legally enforceable commitment,improved access of EU (and other countries') financial institutions to the US market,and non-discriminatory treatment of their operations.

Banking

Sectoralsegmentation andaccess to newfinancial powers forfinancial holdingcompanies

Product-related limitations on activities and affiliations are of great interest to EUfirms. The Gramm-Leach-Bliley Act of1999 removes many of the remainingrestrictions in the financial sector. GLBA makes it possible for banks to affiliatewith insurance companies, eliminates the remaining Glass-Steagall restrictions onaffiliations between banks and securities firms and generally expands the scope ofpermissible financial activities. US bank holding companies and foreign banks thatwant to take advantage of the new powers must qualify as a financial holdingcompany or “FHC.” Restrictions that bar affiliations between commercial firms andbanking institutions have not been removed and in some respects have beenstrengthened (viz., the elimination of the so-called exception for unitary thriftholding companies). However, in an attempt to compromise the interests of banks,insurance companies and securities firms, the legislation contains an important newexception that permits FHCs to make merchant banking investments. These consistof controlling investments by FHCs in commercial firms subject to restrictions onthe ability of the FHC to engage in day-to-day control of the company and to timelimits on the holding. The US financial services industry has objected toregulations issued by the Federal Reserve and the Treasury Department that imposeaggregate limits and capital charges on merchant banking investments.

The statute establishes standards for domestic bank holding companies to qualify asFHCs and requires that the Federal Reserve Board adopt “comparable” standards forforeign banks taking into account the principles of national treatment and equality ofcompetitive opportunity. In January, the Federal Reserve issued an Interim Rulethat spells out the standards for both domestic bank holding companies and foreignbanks. This rule is effective until it is replaced by a Final Rule, which is expectedmid-late summer 2000. The Interim Rule itself has elicited comment from Europeanbanks and governmental authorities that it does not provide foreign banks withtreatment comparable to that granted to domestic institutions. The EuropeanCommission has expressed serious concern about the Interim Rule in severalexchanges with the Federal Reserve Board. It also undertook a diplomaticdémarche vis-à-vis the State Department together with the Portuguese Presidencyon behalf of all the Member States. The regulations are criticised for failing toprovide foreign banks national treatment and equality of competitive opportunity, forbeing inconsistent with both the concept of consolidated supervision on a home


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country basis and the Basle Capital Accord and for raising significant extraterritorialissues. In particular, the Federal Reserve is imposing a leverage capital ratio on theforeign bank even though such requirements are not required by the BasleCommittee or the home countries of European banks and in the past the FederalReserve has concluded that leverage ratios are unnecessary for foreign banks.

Debanking problemsPrior to the Gramm-Leach-Bliley Act an EU firm could have been required to giveup its banking license in the US as a result of, for example, a merger in Europe withan EU insurance company. These limitations were of particular concern to EUcompanies looking to exploit the new flexibility in the Single Market to developintegrated financial services operations. GLBA removes the need for Europeanfinancial groups to give up banking or insurance operations in the US as the price ofa merger taking place in Europe. However, concerns with the standards beingapplied to foreign banks to qualify as FHCs, initial indications that the FederalReserve will limit the scope of new financial activities such as merchant banking,and uncertainties concerning the Board’s supervisory authority over insurancecompanies by virtue of its role as “umbrella regulator” mean that for manydiversified European groups “rebanking” in the United States may not be anattractive prospect.

Geographicalsegmentation andestablishment issues

The long-standing geographical segmentation of the US financial services industryhas been largely removed by the Interstate Banking and Branching Efficiency Act of1994 (the Riegle-Neal Act). Interstate banking is now possible on anon-discriminatory basis through bank acquisition, consolidation (or merger) and, wherestate law permits, de novo branching. Gramm-Leach-Bliley contains a provisionmaking it easier for foreign banks to upgrade an agency or limited branch officeoutside of the foreign bank’s home state to a full service branch acceptingwholesale deposits if permitted by state law and if the office meets certain age tests.Since 1991 EU banks have not been permitted to establish or acquire US branchesthe deposits of which are insured by the Federal Deposit Insurance Corporation otherthan through a US bank subsidiary.

Insurance

Links to banksThe US insurance market is the largest in the world, although its relative share of theworld market has been constantly diminishing. As discussed above in the context ofdebanking, the Gramm-Leach-Bliley Act has removed the statutory obstacle tooperate in the US market for EU insurance companies that are affiliated outside theUS with a bank having a branch, agency or a commercial lending company or a banksubsidiary in the US.

Access issues understate law

A remaining impediment for EU insurance companies seeking to operate in the USmarket is the fragmentation of the market into 54 different jurisdictions, withdifferent licensing, solvency and operating requirements. Each state has its owninsurance regulatory structure and, by contrast to banking, federal law does notprovide for the establishment of federally licensed or regulated insurance companies.However, interest in establishing a federal statutory structure for licensing andregulation of insurance is growing.

The US regulatory/supervisory structure is far behind that of the EU, and this entailsheavy compliance costs for EU companies in each of the 54 jurisdictions. TheNational Association of Insurance Commissioners (NAIC) is making a tentativeattempt to harmonise some basic regulatory requirements between the states, but thiswill be a long process. The NAIC's recommendations are not binding, so even if


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state insurance commissioners agree to some further harmonisation, implementationat state level cannot be guaranteed. Allied to the costs involved in dealing with thisoutdated regulatory structure, EU companies also face direct discrimination on anumber of fronts. For example:

– not all states have "port of entry legislation". In other words, to underwrite risksin one state, an EU insurance company must first be licensed in another statebefore seeking a licence in the first state;

– some states require their insurers to buy reinsurance from state-licensedcompanies, before allowing reinsurance premiums to leave the state;

– those EU companies that specialise in the US$ 9 billion "surplus lines" market(large industrial, transport, or hard-to-place risks), such as Lloyd’s and the Parismarket have to be "white-listed" by the NAIC to operate on a cross-border basisin the US. In order to receive approval, companies have to,inter alia, name a USattorney and lodge a trust fund in a US bank of up to US$ 60 million. No creditis given for the fact that EU companies are effectively regulated in the EU or forsituations where the retrocession takes place to US domestic insurers. Partly as aresult of these rigid requirements, market share of Lloyd's on the surplus linesmarket has dropped from 20% to 14% over the last 10 years. Other non-UScompanies share of the market has also dropped from 12% to 9% over the sameperiod.

However, there is a growing body of industry opinion in the US in favour of furtherliberalisation of their domestic market. This has led the NAIC to considerderegulation/harmonisation of state laws for commercial lines of insurance (largerisks).

In the context of the Transatlantic Economic Partnership, the EU and the US arepresently exploring possibilities for achieving (some form of) mutual recognition inthis sector. The objective would be to facilitate cross-border underwriting ofinsurance by removing unnecessary obstacles and reducing red tape.

Independent of the regulatory framework, certain foreign insurers have also beenconcerned by several state laws to revoke licenses of their US insurance subsidiariesbased on failure to cooperate with the Insurance Commission (IC) set up to pursueinsurance claims of Holocaust victims. Faced with a growing number of class actionlawsuits and legislation at the state level pertaining to insurance claims of Holocaustvictims, in 1998 a number of EU insurance firms joined with Jewish and Holocaustsurvivor organisations and US insurance regulators to form an InternationalCommission to pursue these questions in an expeditious and fair manner. TheMemorandum of Understanding (MoU) establishing the IC provides that theinsurance regulators would work to achieve exemptions from existing and pendingstate legislation for companies that sign the MoU and fully co-operate with theprocess and funding of the IC. Despite this provision and despite the progress madein the IC to establish a claims settlement process, sub-federal sanctions legislationwhich requires foreign insurance companies in the US to co-operate with stateregulators’ new investigative powers, and threatens them with suspension ofoperating licences, continues to pose difficulties to EU firms.

Securities


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Establishmentproblems

EU securities firms may register as broker-dealers or investment advisers, and may inprinciple establish both in the form of branches or subsidiaries. However, theestablishment of a branch in the US by a foreign securities firm to engage in broker-dealer activities, although legally possible, is in fact not practicable, sinceregistration as a broker-dealer means that the foreign firm incorporated outside theUS establishing the branch has to register and become itself subject to Securities andExchange Commission (SEC) regulation. Foreign mutual funds have not been ableto make public offerings in the US because the SEC’s conditions make itimpracticable for a foreign fund to register under the US Investment Company Act of1940.

Reciprocityrequirements

At the Federal level, the Primary Dealers Act (22 USC 5341) prohibits firms fromcountries that do not satisfy reciprocal national treatment requirements and whichwere not authorised before 31 July 1987 (with the exception of Canadian and Israelifirms) from becoming or continuing to act as primary dealers in US governmentbonds. The Federal Reserve Board has carried out examinations of four governmentsecurities markets in the EU (Germany, United Kingdom, France and theNetherlands) and concluded that US firms were generally granted national treatmentin dealing in government securities in those Member States. The Primary DealersAct is often cited as the first step by the US in the direction of conditional nationaltreatment, although it is not a tool that has been utilised to exclude any Europeanfirm from the US market.

7.4 Transport Services

Air Transport Services

Computersreservation systems

Until recently, computer reservation systems (CRS) gave preference in the US to“on-line” services (connections with the same carrier) over “interline” services(connections with other carriers). This practice implicitly disadvantages all non-UScarriers which, unlike their US competitors, have to rely on interline connections fortraffic to and from US points other than their own gateways (behind gateway traffic).A degree of progress has been achieved with the publication of a Final Rule inDecember 1997 which will require each CRS to offer one display that lists flightswithout giving all on-line connections a preference over inter-line connections.However, it is not clear that non-stop flights will be shown first in the display.

Foreign ownership ofair carriers

The Federal Aviation Act of 1958 prohibits foreign investors from taking more thana 49% stake in a US carrier and restricts the holding of voting stock to 25%. Thislatter limitation makes US rules on foreign ownership considerably more restrictivethan relevant EU rules. Cross border investment is an important driving force behindliberalisation. Reducing foreign ownership restrictions would give better access forcarriers to international capital, which in turn would contribute to growth,competitive effectiveness, and the promotion of competition and consumer benefits.In the past the US Administration has advocated liberalisation of foreign investmentrestrictions, but thus far no progress has been achieved in this area.

Hatch amendmentThe Hatch Amendment, which was signed into law on 24 April 1996, requires theFederal Aviation Administration (FAA) to apply security measures to foreigncarriers, identical to those already applied by the FAA to US airlines serving thesame US airports. The FAA final rule, implementing the law, has yet not been


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issued. Whilst the EU supports efforts to improve aviation security, such legislationamounts to a breach of international agreements. Efforts to improve internationalaviation security should be handled, as has hitherto been the case, by multilateralnegotiations especially since US procedures may not be the most effective in a non-US environment.

Aircraft RepairStations

The FAA reauthorisation bill (AIR-21) of April 2000 directs the Administrator toestablish an aircraft repair and maintenance advisory panel. It also directs theSecretary of Transportation to request information from foreign air carriers in orderto assess balance of trade issues. The EU remains concerned that a conflict coulddevelop with the GATS-specific commitments undertaken by the US regardingaircraft repair and maintenance services.

Fly America ActSection 1117 of the Federal Aviation Act requires that, in general, transportationfunded by the US Government (passengers and cargo; mail is covered by separatelegislation) must be performed by US carriers. In the EU any obligation forgovernment officials to use “national flag” is considered to be anti-competitive andcontrary to the Treaty.

LeasingThe US and EU rules on dry leasing are broadly similar in effect. However, Article8(3) of Council Regulation (EEC) No 2407/92 limits leases of foreign registeredaircraft by EU carriers to a short term to meet their temporary needs; or otherwise ifthere are exceptional circumstances. Many EU carriers lease equipment (both withand without flight crew) from US carriers and leasing companies.

The US rules on wet lease prevent any lease of non-US registered aircraft by UScarriers. No Community registered aircraft with Community flight crew can thus beleased to US companies. The US authorities subject applications for wet leases byEU carriers of third country aircraft for use on routes to the US to a "public interest"test.

Maritime Transport Services

WTO negotiations on international maritime transport were suspended on 28 June1996. Resumption is scheduled at the same time as the new round of negotiations onthe liberalisation of services by the year 2000. In the meantime, WTO Membersagreed to observe a standstill clause. The EU regretted that, during the negotiations,the US never tabled an offer relating to maritime transport services and firmly hopesthat the US will endeavour to achieve a multilateral agreement in order to create abetter environment for shippers and ship-operators. The EU maintains that the mosteffective means to achieve the widest possible liberalisation of the sector is throughthe WTO.

International maritime transport markets in the US are predominantly open.However, significant restrictions remain on the use of foreign built vessels in the UScoastwise trade and in relation to access to certain international cargoes from whichnon-US vessels are excluded.

Coastwise tradeIn particular, foreign-built (or rebuilt) vessels are prohibited from engaging incoastwise trade either directly between two points of the US or via a foreign port.Trade with US island territories and possessions are included in the definition ofcoastwise trade (Merchant Marine Act of 1920 - the Jones Act). Moreover, thedefinition of vessels has been interpreted by the US Administration to coverhovercraft and inflatable rafts. These limitations on rebuilding act as anotherdiscrimination against foreign materials: the rebuilding of a vessel of over 500 gross


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tonnes (gt) must be carried out within the US if it is to engage in coastwise trade. Asmaller vessel (under 500 gt) may lose its existing coastwise rights if the rebuildingabroad or in the US with foreign materials is extensive (46 USC 83, amendments of1956 and 1960).

In the context of the negotiations for the OECD Shipbuilding Agreement, it wasagreed that the Jones Act would be subject to a special review and monitoringprocedures.

In addition, no foreign-built vessels can be documented and registered for dredging,towing or salvaging in the US. Third countries are thus not able to have access tothe US market at a time when part of the ageing US fleet needs to be renewed andmany US ports are in need of dredging.

Cargo preferencesmeasures

The US have a number of statutes in place which require certain types ofgovernment-owned or financed cargoes to be carried on US-flag commercial vessels.The impact of these cargo preference measures is very significant. They deny EUand other non-US competitors access to a very sizeable pool of US cargo, whileproviding US ship owners with guaranteed cargoes at protected, highly remunerativerates.

The application of the measures to US public procurement contracts introducesuncertainty for those businesses whose tenders include shipping goods to the US.Whether they are required to ship the goods on US-flagged vessels, which chargesignificantly higher freight rates than other vessels, is not known until after the awardof the contract.

The relevant legislative provisions are:

- The Cargo Preference Act of 1904 requires that all items procured for or owned bythe military departments be carried exclusively on US-flag vessels.

- Public Resolution N°17, enacted in 1934, requires that 100% of any cargoesgenerated by US Government loans (i.e. commodities financed by Export-ImportBank loans) be shipped on US-flag vessels, although MARAD may grant waiverspermitting up to 50% of the cargo to be shipped on vessels of the trading partner.

- The Cargo Preference Act of 1954 requires that at least 50% of all USgovernment-generated cargoes subject to law be carried on privately-owned US flagcommercial vessels if they are available at fair and reasonable rates.

- The Food Security Act of 1985 increases to 75% the minimum proportion ofagricultural cargoes under certain foreign assistance programs to be shipped on US-flag vessels.


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LIST OF FREQUENTLY USED ABBREVIATIONS

ASCM Agreement on Subsidies and Countervailing MeasuresDoC Department of CommerceDoD Department of DefenseFAA Federal Aviation AdministrationFCC Federal Communications CommissionFDA Food and Drug AdministrationGATS General Agreement on Trade in ServicesGATT General Agreement on Tariffs and TradeGPA Government Procurement AgreementMFN Most-favoured nationNASA National Aeronautics and Space AdministrationNTA New Transatlantic AgendaOECD Organisation for Economic Co-operation and DevelopmentTBT Technical Barriers to TradeTRIPs Trade Related Aspects of Intellectual Property RightsUSDA US Department of AgricultureUSTR United States Trade RepresentativeWTO World Trade Organisation

report on united states barriers to trade and investmentaei.pitt.edu/42329/1/2000_barriers.pdf ·...

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